MAHLE Metal Leve (BVMF:LEVE3) Seems To Use Debt Rather Sparingly

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that MAHLE Metal Leve S.A. (BVMF:LEVE3) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for MAHLE Metal Leve

What Is MAHLE Metal Leve's Net Debt?

The image below, which you can click on for greater detail, shows that MAHLE Metal Leve had debt of R$205.3m at the end of June 2021, a reduction from R$612.1m over a year. However, its balance sheet shows it holds R$246.6m in cash, so it actually has R$41.3m net cash.

A Look At MAHLE Metal Leve's Liabilities

According to the last reported balance sheet, MAHLE Metal Leve had liabilities of R$726.3m due within 12 months, and liabilities of R$421.1m due beyond 12 months. Offsetting this, it had R$246.6m in cash and R$684.3m in receivables that were due within 12 months. So its liabilities total R$216.4m more than the combination of its cash and short-term receivables.

Of course, MAHLE Metal Leve has a market capitalization of R$5.09b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, MAHLE Metal Leve also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, MAHLE Metal Leve grew its EBIT by 248% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if MAHLE Metal Leve can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. MAHLE Metal Leve 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, MAHLE Metal Leve produced sturdy free cash flow equating to 72% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that MAHLE Metal Leve has R$41.3m in net cash. And it impressed us with its EBIT growth of 248% over the last year. So we don't think MAHLE Metal Leve's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for MAHLE Metal Leve (of which 1 shouldn't be ignored!) you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.