Is Salvatore Ferragamo (BIT:SFER) Using Debt Sensibly?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Salvatore Ferragamo S.p.A. (BIT:SFER) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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?

As you can see below, at the end of December 2020, Salvatore Ferragamo had €189.7m of debt, up from €50.5m a year ago. Click the image for more detail. But on the other hand it also has €328.2m in cash, leading to a €138.5m net cash position.

How Strong Is Salvatore Ferragamo's Balance Sheet?

The latest balance sheet data shows that Salvatore Ferragamo had liabilities of €364.8m due within a year, and liabilities of €639.5m falling due after that. On the other hand, it had cash of €328.2m and €142.8m worth of receivables due within a year. So its liabilities total €533.3m more than the combination of its cash and short-term receivables.

Given Salvatore Ferragamo has a market capitalization of €3.06b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Salvatore Ferragamo had a loss before interest and tax, and actually shrunk its revenue by 33%, to €916m. To be frank that doesn't bode well.

So How Risky Is Salvatore Ferragamo?

Although Salvatore Ferragamo had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €59m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Salvatore Ferragamo's profit, revenue, and operating cashflow have changed over the last few years.

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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