Would Sligro Food Group (AMS:SLIGR) Be Better Off With Less Debt?

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.' 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. Importantly, Sligro Food Group N.V. (AMS:SLIGR) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sligro Food Group

What Is Sligro Food Group's Debt?

The image below, which you can click on for greater detail, shows that Sligro Food Group had debt of €178.0m at the end of December 2020, a reduction from €263.0m over a year. On the flip side, it has €13.0m in cash leading to net debt of about €165.0m.

A Look At Sligro Food Group's Liabilities

The latest balance sheet data shows that Sligro Food Group had liabilities of €364.0m due within a year, and liabilities of €402.0m falling due after that. On the other hand, it had cash of €13.0m and €139.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €614.0m.

Sligro Food Group has a market capitalization of €1.17b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Sligro Food Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Sligro Food Group made a loss at the EBIT level, and saw its revenue drop to €1.9b, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

Not only did Sligro Food Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €14m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of €70m. So to be blunt we do think it is risky. 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. Case in point: We've spotted 2 warning signs for Sligro Food Group you should be aware of.

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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