Is Sollers (MCX:SVAV) Using Debt Sensibly?

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 Sollers Public Joint Stock Company (MCX:SVAV) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Sollers

What Is Sollers's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Sollers had debt of ₽10.4b, up from ₽7.21b in one year. However, because it has a cash reserve of ₽5.66b, its net debt is less, at about ₽4.73b.

How Healthy Is Sollers's Balance Sheet?

According to the last reported balance sheet, Sollers had liabilities of ₽33.6b due within 12 months, and liabilities of ₽1.84b due beyond 12 months. Offsetting these obligations, it had cash of ₽5.66b as well as receivables valued at ₽10.7b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₽19.0b.

This deficit casts a shadow over the ₽9.17b 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, Sollers would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sollers'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.

In the last year Sollers wasn't profitable at an EBIT level, but managed to grow its revenue by 62%, to ₽66b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate Sollers's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping ₽1.4b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of ₽4.2b over the last twelve months. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Sollers , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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