Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Brunello Cucinelli S.p.A. (BIT:BC) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
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What Is Brunello Cucinelli's Debt?
The chart below, which you can click on for greater detail, shows that Brunello Cucinelli had €124.7m in debt in December 2022; about the same as the year before. On the flip side, it has €120.0m in cash leading to net debt of about €4.63m.
How Healthy Is Brunello Cucinelli's Balance Sheet?
We can see from the most recent balance sheet that Brunello Cucinelli had liabilities of €388.5m falling due within a year, and liabilities of €541.5m due beyond that. Offsetting this, it had €120.0m in cash and €112.7m in receivables that were due within 12 months. So it has liabilities totalling €697.2m more than its cash and near-term receivables, combined.
Since publicly traded Brunello Cucinelli shares are worth a total of €6.01b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Brunello Cucinelli has a very light debt load indeed.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Brunello Cucinelli has very little debt (net of cash), and boasts a debt to EBITDA ratio of 0.017 and EBIT of 13.7 times the interest expense. So relative to past earnings, the debt load seems trivial. On top of that, Brunello Cucinelli grew its EBIT by 74% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Brunello Cucinelli can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Brunello Cucinelli actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Our View
Happily, Brunello Cucinelli's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. We think Brunello Cucinelli is no more beholden to its lenders, than the birds are to birdwatchers. To our minds it has a healthy happy balance sheet. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Brunello Cucinelli's earnings per share history for free.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
About BIT:BC
Brunello Cucinelli
Engages in the production and sale of clothing, accessories, and lifestyle products in Italy, Europe, North America, Japan, and China.
Solid track record with excellent balance sheet.