David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Sport Lisboa e Benfica - Futebol, SAD (ELI:SLBEN) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Sport Lisboa e Benfica - Futebol SAD
How Much Debt Does Sport Lisboa e Benfica - Futebol SAD Carry?
As you can see below, Sport Lisboa e Benfica - Futebol SAD had €147.4m of debt at June 2019, down from €176.5m a year prior. However, it does have €16.3m in cash offsetting this, leading to net debt of about €131.1m.
How Strong Is Sport Lisboa e Benfica - Futebol SAD's Balance Sheet?
According to the last reported balance sheet, Sport Lisboa e Benfica - Futebol SAD had liabilities of €174.5m due within 12 months, and liabilities of €210.1m due beyond 12 months. On the other hand, it had cash of €16.3m and €83.9m worth of receivables due within a year. So its liabilities total €284.4m more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the €104.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Sport Lisboa e Benfica - Futebol SAD 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 Sport Lisboa e Benfica - Futebol SAD will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Sport Lisboa e Benfica - Futebol SAD reported revenue of €166m, which is a gain of 36%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.
Caveat Emptor
Even though Sport Lisboa e Benfica - Futebol SAD managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping €34m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. However, we note that trailing twelve month EBIT is worse than the free cash flow of €12m and the profit of €29m. So there is arguably potential that the company is going to turn things around. 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. For instance, we've identified 3 warning signs for Sport Lisboa e Benfica - Futebol SAD (1 doesn't sit too well with us) you should be aware of.
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.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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