Yahoo Finance Is Salvatore Ferragamo S.p.A.'s (BIT:SFER) Balance Sheet Strong Enough To Weather A Storm?
While small-cap stocks, such as Salvatore Ferragamo S.p.A. (BIT:SFER) with its market cap of €3.6b, are popular for their explosive growth, investors should also be aware of their balance sheet to judge whether the company can survive a downturn. Understanding the company's financial health becomes essential, as mismanagement of capital can lead to bankruptcies, which occur at a higher rate for small-caps. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is just a partial view of the stock, and I’d encourage you to dig deeper yourself into SFER here.
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SFER’s Debt (And Cash Flows)
Over the past year, SFER has ramped up its debt from €68m to €703m , which includes long-term debt. With this rise in debt, SFER's cash and short-term investments stands at €217m , ready to be used for running the business. Additionally, SFER has produced cash from operations of €202m during the same period of time, leading to an operating cash to total debt ratio of 29%, meaning that SFER’s debt is appropriately covered by operating cash.
Can SFER meet its short-term obligations with the cash in hand?
Looking at SFER’s €346m in current liabilities, it appears that the company has been able to meet these commitments with a current assets level of €722m, leading to a 2.09x current account ratio. The current ratio is calculated by dividing current assets by current liabilities. Usually, for Luxury companies, this is a suitable ratio since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Is SFER’s debt level acceptable?
With a debt-to-equity ratio of 91%, SFER can be considered as an above-average leveraged company. This is a bit unusual for a small-cap stock, since they generally have a harder time borrowing than large more established companies. We can test if SFER’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For SFER, the ratio of 26.12x suggests that interest is comfortably covered, which means that lenders may be inclined to lend more money to the company, as it is seen as safe in terms of payback.
Next Steps:
SFER’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. Since there is also no concerns around SFER's liquidity needs, this may be its optimal capital structure for the time being. Keep in mind I haven't considered other factors such as how SFER has been performing in the past. You should continue to research Salvatore Ferragamo to get a more holistic view of the small-cap by looking at:
Future Outlook: What are well-informed industry analysts predicting for SFER’s future growth? Take a look at our free research report of analyst consensus for SFER’s outlook.
Valuation: What is SFER worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether SFER is currently mispriced by the market.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
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