Is Samsonite International (HKG: 1910) a risky investment?
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. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We note that Samsonite International SA (HKG: 1910) has debt on its balance sheet. But the most important question is: what risk does this debt create?
What risk does debt entail?
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. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. 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, debt can be an important tool in businesses, especially capital intensive businesses. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest review for Samsonite International
What is the debt of Samsonite International?
As you can see below, Samsonite International had a debt of US $ 2.87 billion in June 2021, up from US $ 3.20 billion the year before. On the flip side, it has $ 1.06 billion in cash, resulting in net debt of around $ 1.82 billion.
How strong is Samsonite International’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Samsonite International had a liability of $ 752.8 million due within 12 months and a liability of $ 3.34 billion beyond. In return, he had $ 1.06 billion in cash and $ 163.8 million in receivables due within 12 months. Its liabilities therefore total $ 2.87 billion more than the combination of its cash and short-term receivables.
This is a mountain of leverage compared to its market cap of $ 3.36 billion. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the future profitability of the business will decide whether Samsonite International 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, Samsonite International has incurred a loss before interest and taxes and has actually reduced its revenue by 43% to $ 1.5 billion. It makes us nervous, to say the least.
Not only has Samsonite International’s revenue declined over the past twelve months, it has also produced negative earnings before interest and taxes (EBIT). In fact, it lost US $ 188 million in EBIT. When we look at this and recall the liabilities on its balance sheet, versus the cash flow, it seems unwise to us that the company has debt. We therefore believe that its record is a bit strained, but not irreparable. For example, we wouldn’t want to see a repeat of last year’s loss of US $ 446 million. So, to be frank, we think it’s risky. For riskier companies like Samsonite International, I always like to keep an eye on long-term profit and income trends. Fortunately, you can click to view our interactive graph of its operating profit, revenue and cash flow.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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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