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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. We can see that Savills plc (LON:SVS) does use debt in its business. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Savills
What Is Savills's Net Debt?
As you can see below, Savills had UK£160.6m of debt at December 2020, down from UK£181.4m a year prior. However, it does have UK£338.3m in cash offsetting this, leading to net cash of UK£177.7m.
How Strong Is Savills' Balance Sheet?
We can see from the most recent balance sheet that Savills had liabilities of UK£711.1m falling due within a year, and liabilities of UK£454.6m due beyond that. On the other hand, it had cash of UK£338.3m and UK£506.5m worth of receivables due within a year. So it has liabilities totalling UK£320.9m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Savills has a market capitalization of UK£1.58b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Savills also has more cash than debt, so we're pretty confident it can manage its debt safely.
The modesty of its debt load may become crucial for Savills if management cannot prevent a repeat of the 33% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Savills 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.