Saras (BIT:SRS) Takes On Some Risk With Its Use Of 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.' 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 can see that Saras S.p.A. (BIT:SRS) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Saras

How Much Debt Does Saras Carry?

You can click the graphic below for the historical numbers, but it shows that Saras had €607.2m of debt in September 2022, down from €1.21b, one year before. But it also has €851.9m in cash to offset that, meaning it has €244.7m net cash.

How Strong Is Saras' Balance Sheet?

The latest balance sheet data shows that Saras had liabilities of €2.98b due within a year, and liabilities of €835.2m falling due after that. On the other hand, it had cash of €851.9m and €942.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.02b.

This deficit casts a shadow over the €1.15b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Saras would likely require a major re-capitalisation if it had to pay its creditors today. Saras boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Although Saras made a loss at the EBIT level, last year, it was also good to see that it generated €1.0b in EBIT over the last twelve months. 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 Saras 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. Saras 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 most recent year, Saras recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While Saras does have more liabilities than liquid assets, it also has net cash of €244.7m. And it impressed us with free cash flow of €782m, being 76% of its EBIT. So while Saras does not have a great balance sheet, it's certainly not too bad. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Saras that you should be aware of before investing here.

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.