Is Samsonite International (HKG:1910) a risky investment?

Some people say that volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said, “Volatility is not synonymous with risk.” When we think about a company’s risk, we always look at its use of debt. Because too much debt can lead to ruin.I understand that Samsonite International SA (HKG:1910) uses debt in its operations. But should shareholders be worried about its use of debt?

When is debt a problem?

Generally, debt only becomes a real problem if a company cannot easily pay it off, either by raising capital or with its own cash flow. If the situation gets too bad, lenders may take control of your business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, resulting in permanent shareholder dilution. Having said that, the most common situation is one in which a company manages its debt reasonably well and to its own advantage. The first thing to do when considering how much debt a company uses is to look at its cash and debt together.

Check out our latest analysis for Samsonite International.

What is Samsonite International’s debt?

The graphic below, which you can click on for historical numbers, shows that Samsonite International had debt of US$1.82b as of September 2023, down from US$2.19b one year ago. I understand. However, it has cash reserves of US$603.4m, so its net debt is less than that, at around US$1.22b.

How healthy is Samsonite International’s balance sheet?

The latest balance sheet data shows that Samsonite International had liabilities of US$1.13b falling due within a year, and liabilities of US$2.37b falling due beyond that. Offsetting this, it had cash of US$603.4m and his receivables of US$343.7m due within 12 months. So its liabilities total US$2.55b more than its cash and short-term receivables, combined.

This is huge leverage compared to its market capitalization of US$4.16 billion. This suggests that shareholders will be significantly diluted if the company needs to strengthen its balance sheet in a hurry.

To determine how much debt a company has relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA), and its earnings before interest, tax, and amortization (EBIT) divided by its interest expense. (its interest cover). Therefore, we consider debt relative to earnings, with or without depreciation.

Samsonite International’s net debt is a very reasonable 1.8x EBITDA, but last year its EBIT was just 5.3x its interest expense. It’s not much to worry about, but it does suggest that interest payments are a bit of a burden. Importantly, Samsonite International grew its EBIT by 53% in the last twelve months, and this growth should help it manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, Samsonite International’s ability to strengthen its balance sheet over the long term will depend on the future profitability of its business.If you’re focused on the future, check this out free A report showing analyst profit forecasts.

Finally, companies need free cash flow to pay down debt. Accounting profits alone are not enough. So the logical step is to look at the proportion of his EBIT that is matched by actual free cash flow. Over the last two years, Samsonite International generated strong free cash flow representing 66% of its EBIT. This is about as expected. This free cash flow puts the company in a good position to pay down debt as needed.

our view

Fortunately, Samsonite International’s impressive EBIT growth rate suggests that it has a good debt advantage. But on a darker note, we’re a bit concerned about its total debt levels. Taking all of the aforementioned factors together, we can see that Samsonite International can handle its debt fairly easily. Of course, this leverage can improve return on equity, but it also brings more risk, so it’s worth noting this. The balance sheet is clearly the area to focus on when analyzing debt. Ultimately, however, any company can contain risks that exist outside the balance sheet. We’ve identified 1 warning sign We have partnerships with Samsonite International, and understanding them should be part of your investment process.

If you’re more interested in fast-growing companies with rock-solid balance sheets, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.