Is Sport Lisboa e Benfica - Futebol SAD (ELI:SLBEN) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Sport Lisboa e Benfica - Futebol, SAD (ELI:SLBEN) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Sport Lisboa e Benfica - Futebol SAD

What Is Sport Lisboa e Benfica - Futebol SAD's Net Debt?

The chart below, which you can click on for greater detail, shows that Sport Lisboa e Benfica - Futebol SAD had €146.6m in debt in December 2020; about the same as the year before. However, because it has a cash reserve of €29.6m, its net debt is less, at about €117.0m.

How Healthy Is Sport Lisboa e Benfica - Futebol SAD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sport Lisboa e Benfica - Futebol SAD had liabilities of €190.4m due within 12 months and liabilities of €234.6m due beyond that. Offsetting these obligations, it had cash of €29.6m as well as receivables valued at €94.3m due within 12 months. So its liabilities total €301.2m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €68.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Sport Lisboa e Benfica - Futebol SAD would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sport Lisboa e Benfica - Futebol SAD'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.

Over 12 months, Sport Lisboa e Benfica - Futebol SAD made a loss at the EBIT level, and saw its revenue drop to €92m, which is a fall of 44%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Sport Lisboa e Benfica - Futebol SAD's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping €119m. 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. But we think that is unlikely since it is low on liquid assets, and made a loss of €54m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Sport Lisboa e Benfica - Futebol SAD (including 1 which 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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