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. 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. As with many other companies Saras S.p.A. (BIT:SRS) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Saras
What Is Saras's Net Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Saras had debt of €361.8m, up from €319.4m in one year. However, it does have €461.2m in cash offsetting this, leading to net cash of €99.4m.
How Healthy Is Saras's Balance Sheet?
We can see from the most recent balance sheet that Saras had liabilities of €1.84b falling due within a year, and liabilities of €498.6m due beyond that. Offsetting this, it had €461.2m in cash and €383.3m in receivables that were due within 12 months. So it has liabilities totalling €1.49b more than its cash and near-term receivables, combined.
When you consider that this deficiency exceeds the company's €1.41b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Saras boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
Shareholders should be aware that Saras's EBIT was down 77% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Saras can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.