We Think Salvatore Ferragamo (BIT:SFER) Can Stay On Top Of Its Debt

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. Importantly, Salvatore Ferragamo S.p.A. (BIT:SFER) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Salvatore Ferragamo

How Much Debt Does Salvatore Ferragamo Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Salvatore Ferragamo had debt of €172.1m, up from €68.1m in one year. But on the other hand it also has €340.3m in cash, leading to a €168.2m net cash position.

How Strong Is Salvatore Ferragamo's Balance Sheet?

The latest balance sheet data shows that Salvatore Ferragamo had liabilities of €364.2m due within a year, and liabilities of €618.8m falling due after that. Offsetting these obligations, it had cash of €340.3m as well as receivables valued at €109.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €533.0m.

Given Salvatore Ferragamo has a market capitalization of €2.80b, 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. Despite its noteworthy liabilities, Salvatore Ferragamo boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Salvatore Ferragamo's EBIT fell a jaw-dropping 83% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Salvatore Ferragamo can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. Happily for any shareholders, Salvatore Ferragamo actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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 €168.2m. The cherry on top was that in converted 151% of that EBIT to free cash flow, bringing in €139m. So we are not troubled with Salvatore Ferragamo's debt use. While Salvatore Ferragamo didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

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.
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