Is Salvatore Ferragamo (BIT:SFER) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Salvatore Ferragamo S.p.A. (BIT:SFER) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Salvatore Ferragamo

What Is Salvatore Ferragamo's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Salvatore Ferragamo had debt of €104.6m, up from €33.4m in one year. But on the other hand it also has €256.0m in cash, leading to a €151.4m net cash position.

A Look At Salvatore Ferragamo's Liabilities

According to the last reported balance sheet, Salvatore Ferragamo had liabilities of €418.8m due within 12 months, and liabilities of €609.6m due beyond 12 months. On the other hand, it had cash of €256.0m and €150.5m worth of receivables due within a year. So its liabilities total €621.9m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Salvatore Ferragamo is worth €1.05b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 22% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Salvatore Ferragamo's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €151.4m. The cherry on top was that in converted 151% of that EBIT to free cash flow, bringing in €61m. So while Salvatore Ferragamo does not have a great balance sheet, it's certainly not too bad. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Salvatore Ferragamo you should know about.

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.