Is Sporting Clube de Portugal - Futebol SAD (ELI:SCP) Using Debt Sensibly?

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. We note that Sporting Clube de Portugal - Futebol, SAD (ELI:SCP) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Sporting Clube de Portugal - Futebol SAD

What Is Sporting Clube de Portugal - Futebol SAD's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Sporting Clube de Portugal - Futebol SAD had debt of €147.2m, up from €132.8m in one year. However, it does have €11.7m in cash offsetting this, leading to net debt of about €135.5m.

How Strong Is Sporting Clube de Portugal - Futebol SAD's Balance Sheet?

According to the last reported balance sheet, Sporting Clube de Portugal - Futebol SAD had liabilities of €154.5m due within 12 months, and liabilities of €157.8m due beyond 12 months. On the other hand, it had cash of €11.7m and €57.8m worth of receivables due within a year. So it has liabilities totalling €242.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €105.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Sporting Clube de Portugal - Futebol SAD would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sporting Clube de Portugal - Futebol SAD 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 Sporting Clube de Portugal - Futebol SAD wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to €118m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Sporting Clube de Portugal - Futebol SAD produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping €40m. 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 burned through €34m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Sporting Clube de Portugal - Futebol SAD , and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.