Here's Why Salvatore Ferragamo (BIT:SFER) Can Manage Its Debt Responsibly

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. As with many other companies Salvatore Ferragamo S.p.A. (BIT:SFER) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Salvatore Ferragamo

What Is Salvatore Ferragamo's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Salvatore Ferragamo had debt of €81.4m, up from €30.4m in one year. But it also has €269.0m in cash to offset that, meaning it has €187.6m net cash.

How Healthy Is Salvatore Ferragamo's Balance Sheet?

We can see from the most recent balance sheet that Salvatore Ferragamo had liabilities of €368.5m falling due within a year, and liabilities of €596.6m due beyond that. Offsetting these obligations, it had cash of €269.0m as well as receivables valued at €106.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €589.3m.

Salvatore Ferragamo has a market capitalization of €1.87b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Salvatore Ferragamo boasts net cash, so it's fair to say it does not have a heavy debt load!

Shareholders should be aware that Salvatore Ferragamo's EBIT was down 46% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Salvatore Ferragamo's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Salvatore Ferragamo may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Salvatore Ferragamo actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Salvatore Ferragamo does have more liabilities than liquid assets, it also has net cash of €187.6m. The cherry on top was that in converted 170% of that EBIT to free cash flow, bringing in €46m. So we don't have any problem with Salvatore Ferragamo's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Salvatore Ferragamo that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.