We believe Salvatore Ferragamo (BIT: SFER) can stay on top of his debt

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Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Above all, Salvatore Ferragamo SpA (BIT: SFER) carries debt. But does this debt worry shareholders?

When Is Debt a Problem?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. If things really go wrong, lenders can take over the business. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

Check out our latest review for Salvatore Ferragamo

How much debt does Salvatore Ferragamo have?

The image below, which you can click for more details, shows that in March 2021 Salvatore Ferragamo had a debt of 172.1 million euros, compared to 68.1 million euros in one year. But on the other hand, it also has 340.3 million euros in cash, which leads to a net cash position of 168.2 million euros.

BIT: SFER History of debt to equity August 22, 2021

How strong is Salvatore Ferragamo’s balance sheet?

The latest balance sheet data shows Salvatore Ferragamo had debts of € 364.2 million maturing within one year, and debts of € 618.8 million maturing thereafter. In compensation for these commitments, he had cash of € 340.3 million as well as receivables valued at € 109.7 million within 12 months. Its liabilities thus exceed the sum of its cash and its receivables (short term) by € 533.0 million.

Given that Salvatore Ferragamo has a market cap of 2.80 billion euros, it is hard to believe that these liabilities pose a threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. Despite his notable liabilities, Salvatore Ferragamo has a net cash flow, so it’s fair to say that he doesn’t have a lot of debt!

It is important to note that Salvatore Ferragamo’s EBIT has fallen 83% over the past twelve months. If this decline continues, then it will be more difficult to pay off the debt than to sell foie gras at a vegan convention. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Salvatore Ferragamo can strengthen his balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. Although Salvatore Ferragamo has net cash on his balance sheet, it’s still worth looking at his ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast he’s building ( or erodes) this cash balance. Fortunately for all shareholders, Salvatore Ferragamo has actually generated more free cash flow than EBIT over the past three years. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.

In summary

Although Salvatore Ferragamo’s balance sheet is not particularly strong, due to total liabilities it is clearly positive to see that he has net cash of € 168.2million. The icing on the cake is that it converted 151% of this EBIT into free cash flow, bringing in 139 million euros. We are therefore not concerned about the use of Salvatore Ferragamo’s debt. While Salvatore Ferragamo did not make a statutory profit last year, his positive EBIT suggests that profitability may not be far off. Click here to see if its profits are heading in the right direction over the medium term.

If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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