Does Kepler Weber (BVMF:KEPL3) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Kepler Weber S.A. (BVMF:KEPL3) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Kepler Weber

What Is Kepler Weber's Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Kepler Weber had debt of R$166.8m, up from R$57.1m in one year. But it also has R$337.9m in cash to offset that, meaning it has R$171.1m net cash.

How Healthy Is Kepler Weber's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kepler Weber had liabilities of R$574.3m due within 12 months and liabilities of R$102.2m due beyond that. On the other hand, it had cash of R$337.9m and R$258.3m worth of receivables due within a year. So it has liabilities totalling R$80.3m more than its cash and near-term receivables, combined.

Of course, Kepler Weber has a market capitalization of R$3.06b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Kepler Weber also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Kepler Weber grew its EBIT by 154% over twelve months. 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 it is future earnings, more than anything, that will determine Kepler Weber'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Kepler Weber 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, Kepler Weber recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. 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 Kepler Weber has R$171.1m in net cash. And it impressed us with its EBIT growth of 154% over the last year. So we don't think Kepler Weber's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Kepler Weber , and understanding them should be part of your investment process.

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.

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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.