We Think MAHLE Metal Leve (BVMF:LEVE3) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, MAHLE Metal Leve S.A. (BVMF:LEVE3) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for MAHLE Metal Leve

What Is MAHLE Metal Leve's Debt?

As you can see below, at the end of March 2023, MAHLE Metal Leve had R$410.3m of debt, up from R$232.3m a year ago. Click the image for more detail. But it also has R$437.5m in cash to offset that, meaning it has R$27.2m net cash.

How Healthy Is MAHLE Metal Leve's Balance Sheet?

According to the last reported balance sheet, MAHLE Metal Leve had liabilities of R$983.3m due within 12 months, and liabilities of R$531.5m due beyond 12 months. On the other hand, it had cash of R$437.5m and R$934.1m worth of receivables due within a year. So it has liabilities totalling R$143.2m more than its cash and near-term receivables, combined.

Since publicly traded MAHLE Metal Leve shares are worth a total of R$4.63b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, MAHLE Metal Leve boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that MAHLE Metal Leve has been able to increase its EBIT by 20% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine MAHLE Metal Leve's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While MAHLE Metal Leve has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, MAHLE Metal Leve recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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$27.2m in net cash. And it impressed us with its EBIT growth of 20% over the last year. So we don't think MAHLE Metal Leve's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for MAHLE Metal Leve (1 is concerning) you should be aware of.

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. 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.