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. 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?

We've discovered 1 warning sign about Salvatore Ferragamo. View them for free.

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Salvatore Ferragamo's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Salvatore Ferragamo had €116.1m of debt, an increase on €81.4m, over one year. But on the other hand it also has €288.6m in cash, leading to a €172.5m net cash position.

A Look At Salvatore Ferragamo's Liabilities

We can see from the most recent balance sheet that Salvatore Ferragamo had liabilities of €479.5m falling due within a year, and liabilities of €601.3m due beyond that. Offsetting this, it had €288.6m in cash and €131.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €661.1m.

This deficit is considerable relative to its market capitalization of €1.00b, so it does suggest shareholders should keep an eye on Salvatore Ferragamo's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Salvatore Ferragamo 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.

Check out our latest analysis for Salvatore Ferragamo

Over 12 months, Salvatore Ferragamo made a loss at the EBIT level, and saw its revenue drop to €1.0b, which is a fall of 10%. That's not what we would hope to see.

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 €100m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Salvatore Ferragamo that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.