The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. We can see that S.S. Lazio S.p.A. (BIT:SSL) does use debt in its business. But the more important question is: how much risk is that debt creating?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is S.S. Lazio’s Debt?
The image below, which you can click on for greater detail, shows that at June 2019 S.S. Lazio had debt of €59.5m, up from €50.5m in one year. However, it also had €3.90m in cash, and so its net debt is €55.6m.
How Strong Is S.S. Lazio’s Balance Sheet?
According to the last reported balance sheet, S.S. Lazio had liabilities of €115.1m due within 12 months, and liabilities of €95.9m due beyond 12 months. On the other hand, it had cash of €3.90m and €46.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €161.1m.
Given this deficit is actually higher than the company’s market capitalization of €131.8m, we think shareholders really should watch S.S. Lazio’s debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There’s no doubt that we learn most about debt from the balance sheet. But it is S.S. Lazio’s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year S.S. Lazio’s revenue was pretty flat, and it made a negative EBIT. While that’s not too bad, we’d prefer see growth.
Over the last twelve months S.S. Lazio produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping €29m. Considering that alongside the liabilities mentioned above make us nervous about the company. We’d want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of €35m over the last twelve months. That means it’s on the risky side of things. 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. To that end, you should learn about the 2 warning signs we’ve spotted with S.S. Lazio (including 1 which is is a bit unpleasant) .
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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