Kepler Weber (BVMF:KEPL3) Has A Rock Solid Balance Sheet

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.' 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. We note that Kepler Weber S.A. (BVMF:KEPL3) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Kepler Weber

How Much Debt Does Kepler Weber Carry?

The image below, which you can click on for greater detail, shows that Kepler Weber had debt of R$9.48m at the end of March 2021, a reduction from R$52.1m over a year. But it also has R$232.3m in cash to offset that, meaning it has R$222.9m net cash.

How Healthy Is Kepler Weber's Balance Sheet?

We can see from the most recent balance sheet that Kepler Weber had liabilities of R$382.7m falling due within a year, and liabilities of R$34.0m due beyond that. Offsetting this, it had R$232.3m in cash and R$133.4m in receivables that were due within 12 months. So it has liabilities totalling R$50.9m more than its cash and near-term receivables, combined.

Of course, Kepler Weber has a market capitalization of R$1.40b, 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.

On top of that, Kepler Weber grew its EBIT by 98% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Kepler Weber will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 last three years, Kepler Weber actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Kepler Weber has R$222.9m in net cash. The cherry on top was that in converted 120% of that EBIT to free cash flow, bringing in R$223m. So is Kepler Weber's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 2 warning signs for Kepler Weber that you should be aware of.

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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