Does Sanlorenzo (BIT:SL) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Sanlorenzo S.p.A. (BIT:SL) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Sanlorenzo

How Much Debt Does Sanlorenzo Carry?

The image below, which you can click on for greater detail, shows that Sanlorenzo had debt of €89.4m at the end of September 2023, a reduction from €104.5m over a year. But it also has €201.5m in cash to offset that, meaning it has €112.1m net cash.

How Healthy Is Sanlorenzo's Balance Sheet?

The latest balance sheet data shows that Sanlorenzo had liabilities of €414.4m due within a year, and liabilities of €52.5m falling due after that. On the other hand, it had cash of €201.5m and €166.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €98.9m.

Given Sanlorenzo has a market capitalization of €1.37b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Sanlorenzo also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also positive, Sanlorenzo grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sanlorenzo'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Sanlorenzo 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 three years, Sanlorenzo recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sanlorenzo has €112.1m in net cash. The cherry on top was that in converted 84% of that EBIT to free cash flow, bringing in €79m. So is Sanlorenzo's debt a risk? It doesn't seem so to us. We'd be very excited to see if Sanlorenzo insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.