Is Salvatore Ferragamo (BIT:SFER) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Salvatore Ferragamo S.p.A. (BIT:SFER) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Salvatore Ferragamo

What Is Salvatore Ferragamo's Debt?

As you can see below, at the end of September 2020, Salvatore Ferragamo had €295.3m of debt, up from €48.1m a year ago. Click the image for more detail. However, it does have €369.8m in cash offsetting this, leading to net cash of €74.4m.

How Strong Is Salvatore Ferragamo's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Salvatore Ferragamo had liabilities of €454.2m due within 12 months and liabilities of €661.4m due beyond that. Offsetting these obligations, it had cash of €369.8m as well as receivables valued at €110.0m due within 12 months. So its liabilities total €635.8m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Salvatore Ferragamo is worth €2.72b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Salvatore Ferragamo also has more cash than debt, so we're pretty confident it can manage its debt safely. 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.

Over 12 months, Salvatore Ferragamo made a loss at the EBIT level, and saw its revenue drop to €994m, which is a fall of 27%. That makes us nervous, to say the least.

So How Risky Is Salvatore Ferragamo?

While Salvatore Ferragamo lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €39m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Salvatore Ferragamo , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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