Yduqs Participações (BVMF:YDUQ3) Has A Pretty Healthy Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Yduqs Participações S.A. (BVMF:YDUQ3) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Yduqs Participações

What Is Yduqs Participações's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2020 Yduqs Participações had debt of R$2.44b, up from R$781.1m in one year. However, its balance sheet shows it holds R$2.55b in cash, so it actually has R$102.2m net cash.

A Look At Yduqs Participações's Liabilities

We can see from the most recent balance sheet that Yduqs Participações had liabilities of R$977.7m falling due within a year, and liabilities of R$3.38b due beyond that. On the other hand, it had cash of R$2.55b and R$710.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$1.10b.

Since publicly traded Yduqs Participações shares are worth a total of R$10.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Yduqs Participações boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably Yduqs Participações's EBIT was pretty flat over the last year. Ideally it can diminish its debt load by kick-starting earnings growth. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Yduqs Participações's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Yduqs Participações may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Yduqs Participações generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing up

While Yduqs Participações does have more liabilities than liquid assets, it also has net cash of R$102.2m. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in R$623m. So we are not troubled with Yduqs Participações's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 3 warning signs we've spotted with Yduqs Participações .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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