Health Check: How Carefully Does Samsonite International (HKG: 1910) Use Debt?
David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We notice that Samsonite International S.A. (HKG:1910) has a debt on its balance sheet. But the real question is whether this debt makes the business risky.
When is debt dangerous?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
See our latest analysis for Samsonite International
What is Samsonite International’s debt?
The image below, which you can click for more details, shows that Samsonite International had $2.81 billion in debt at the end of September 2021, a reduction from $3.21 billion year-on-year. However, he also had $1.15 billion in cash, so his net debt is $1.66 billion.
How strong is Samsonite International’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Samsonite International had liabilities of US$795.4 million due within 12 months and liabilities of US$3.26 billion due beyond. As compensation for these obligations, it had cash of US$1.15 billion and receivables valued at US$179.0 million due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $2.72 billion.
This is a mountain of leverage compared to its market capitalization of US$3.01 billion. If its lenders asked it to shore up its balance sheet, shareholders would likely face significant dilution. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Samsonite International’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Year-over-year, Samsonite International recorded a loss in EBIT and saw its revenue fall to $1.8 billion, a decline of 16%. This is not what we hope to see.
Not only has Samsonite International’s revenue dropped over the past twelve months, it has also produced negative earnings before interest and tax (EBIT). To be precise, the EBIT loss amounted to 62 million US dollars. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has liabilities. Quite frankly, we think the track record falls short, although it could improve over time. We’d feel better if he turned his year-over-year loss of US$341 million into a profit. In the meantime, we consider the stock to be very risky. For riskier companies like Samsonite International, I always like to keep an eye on long-term profit and revenue trends. Luckily, you can click through to see our interactive graph of its earnings, revenue, and operating cash flow.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.