Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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 real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. 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. 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?
As you can see below, S.S. Lazio had €46.0m of debt, at December 2018, which is about the same the year before. You can click the chart for greater detail. However, because it has a cash reserve of €6.44m, its net debt is less, at about €39.5m.
How Healthy Is S.S. Lazio’s Balance Sheet?
The latest balance sheet data shows that S.S. Lazio had liabilities of €134.5m due within a year, and liabilities of €101.6m falling due after that. On the other hand, it had cash of €6.44m and €77.0m worth of receivables due within a year. So its liabilities total €152.6m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the €81.3m company, like a colossus towering over mere mortals. So we’d watch its balance sheet closely, without a doubt After all, S.S. Lazio would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But you can’t view debt in total isolation; since S.S. Lazio will need earnings to service that debt. 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 managed to grow its revenue by 15%, to €129m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Importantly, S.S. Lazio had negative earnings before interest and tax (EBIT), over the last year. Indeed, it lost a very considerable €19m at the EBIT level. 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. It’s fair to say the loss of-€1.9m didn’t encourage us either; we’d like to see a profit. In the meantime, we consider the stock to be risky. For riskier companies like S.S. Lazio I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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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