These 4 Measures Indicate That Salvatore Ferragamo (BIT:SFER) Is Using Debt Reasonably Well

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 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. 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?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that Salvatore Ferragamo had €30.4m of debt in December 2022, down from €139.1m, one year before. However, it does have €391.4m in cash offsetting this, leading to net cash of €361.0m.

A Look At Salvatore Ferragamo's Liabilities

We can see from the most recent balance sheet that Salvatore Ferragamo had liabilities of €352.1m falling due within a year, and liabilities of €468.7m due beyond that. Offsetting these obligations, it had cash of €391.4m as well as receivables valued at €94.5m due within 12 months. So its liabilities total €335.0m more than the combination of its cash and short-term receivables.

Of course, Salvatore Ferragamo has a market capitalization of €2.65b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Salvatore Ferragamo boasts net cash, so it's fair to say it does not have a heavy debt load!

Sadly, Salvatore Ferragamo's EBIT actually dropped 8.9% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Salvatore Ferragamo has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Salvatore Ferragamo actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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 €361.0m. And it impressed us with free cash flow of €211m, being 202% of its EBIT. So we are not troubled with Salvatore Ferragamo's debt use. When analysing debt levels, the balance sheet is the obvious place to start. 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.