These 4 Measures Indicate That Kepler Weber (BVMF:KEPL3) Is Using Debt Safely

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. As with many other companies Kepler Weber S.A. (BVMF:KEPL3) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

View 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 March 2022 Kepler Weber had debt of R$57.2m, up from R$9.48m in one year. However, its balance sheet shows it holds R$160.7m in cash, so it actually has R$103.5m net cash.

A Look At Kepler Weber's Liabilities

According to the last reported balance sheet, Kepler Weber had liabilities of R$482.4m due within 12 months, and liabilities of R$65.0m due beyond 12 months. Offsetting this, it had R$160.7m in cash and R$173.6m in receivables that were due within 12 months. So it has liabilities totalling R$213.1m more than its cash and near-term receivables, combined.

Since publicly traded Kepler Weber shares are worth a total of R$1.54b, 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, Kepler Weber boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Kepler Weber grew its EBIT by 215% 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 Kepler Weber 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 73% 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

Although Kepler Weber's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of R$103.5m. And it impressed us with its EBIT growth of 215% over the last year. So is Kepler Weber's debt a risk? It doesn't seem so to us. 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 Kepler Weber (1 is potentially serious) 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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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.