Is Safilo Group (BIT:SFL) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Safilo Group S.p.A. (BIT:SFL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

View our latest analysis for Safilo Group

How Much Debt Does Safilo Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 Safilo Group had €249.6m of debt, an increase on €107.5m, over one year. However, it does have €110.9m in cash offsetting this, leading to net debt of about €138.7m.

A Look At Safilo Group's Liabilities

The latest balance sheet data shows that Safilo Group had liabilities of €561.4m due within a year, and liabilities of €217.9m falling due after that. On the other hand, it had cash of €110.9m and €190.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €478.2m.

This deficit casts a shadow over the €221.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Safilo Group would probably need a major re-capitalization if its creditors were to demand repayment. 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 Safilo Group'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.

Over 12 months, Safilo Group made a loss at the EBIT level, and saw its revenue drop to €779m, which is a fall of 17%. That's not what we would hope to see.

Caveat Emptor

While Safilo Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable €67m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through €19m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Safilo Group you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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