Legendary fund manager Li Lu (who 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. Mostly, Saipem SpA (BIT: SPM) carries a debt. But does this debt concern shareholders?
When Is Debt a Problem?
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 think of a business’s use of debt, we first look at cash flow and debt together.
See our latest analysis for Saipem
What is Saipem’s debt?
As you can see below, at the end of March 2021, Saipem had 950.0 million euros in debt, up from 632.0 million euros a year ago. Click on the image for more details. But on the other hand, it also has 1.76 billion euros in cash, which leads to a net cash position of 805.0 million euros.
How strong is Saipem’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Saipem had liabilities of € 4.90 billion due within 12 months and liabilities of € 1.68 billion due beyond. In return, he had € 1.76 billion in cash and € 3.87 billion in receivables due within 12 months. It therefore has total liabilities of € 963.0 million more than its combined cash and short-term receivables.
Saipem has a market capitalization of 1.96 billion euros, so it could most likely raise cash to improve its balance sheet, should the need arise. However, it is always worth taking a close look at your ability to repay debts. While he has some liabilities to note, Saipem also has more cash than debt, so we’re pretty confident he can handle his debt safely. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Saipem’s ability to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Over the past year, Saipem has recorded a loss before interest and taxes and actually reduced its revenue by 26% to € 6.8 billion. To be frank, that doesn’t bode well.
So how risky is Saipem?
By their very nature, businesses that lose money are riskier than those with a long history of profitability. And the point is that over the past twelve months Saipem has lost money in earnings before interest and taxes (EBIT). Indeed, during this period, it burned 274 million euros of cash and recorded a loss of 987 million euros. With only € 805.0 million on the balance sheet, it seems that we will soon have to raise capital again. Overall, we would say the stock is a bit risky, and we’re generally very cautious until we see positive free cash flow. When we look at a riskier business, we like to see how its profits (or losses) have changed over time. Today we bring readers this interactive graph showing the evolution of Saipem’s profit, revenue and operating cash flow over the past few years.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash growth net stocks today.
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