Share Dilution

Does Saras (BIT: SRS) use debt in a risky way?

Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Saras SpA (BIT: SRS) carries a debt. But the most important question is: what risk does this debt create?

When Is Debt a Problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.

Check out our latest analysis for Saras

What is Saras’ net debt?

As you can see below, at the end of June 2021, Saras had 1.01 billion euros in debt, up from 663.5 million euros a year ago. Click on the image for more details. However, he also had € 545.6 million in cash, so his net debt is € 468.4 million.

BIT: SRS Debt to equity Historical September 26, 2021

A look at Saras’ responsibilities

The latest balance sheet data shows Saras had debts of € 2.09 billion due within one year, and debts of € 742.6 million due thereafter. In return, it had € 545.6 million in cash and € 526.6 million in receivables due within 12 months. Its liabilities therefore amount to € 1.76 billion more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the € 771.9 million company, like a colossus dominating mere mortals. So we would be watching its record closely, without a doubt. After all, Saras would likely need a major recapitalization if she were to pay her creditors today. 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 Saras can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Over the past year, Saras has recorded a loss before interest and taxes and actually reduced its income by 16% to $ 6.3 billion. This is not what we hope to see.

Emptor Warning

Not only has Saras’ revenue declined over the past twelve months, it has also generated negative earnings before interest and taxes (EBIT). To be precise, the EBIT loss amounted to 54 million euros. When we look at this alongside the material liabilities, we’re not particularly confident in the business. It would have to improve its operation quickly for us to take an interest in it. Notably because it has burned 58 million euros in negative free cash flow over the past year. So suffice to say that we consider the title to be risky. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example – Saras has 1 warning sign we think you should be aware.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

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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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