We Think Kepler Weber (BVMF:KEPL3) Can Manage Its Debt With Ease

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Kepler Weber

What Is Kepler Weber's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Kepler Weber had debt of R$50.9m, up from R$42.7m in one year. However, it does have R$210.8m in cash offsetting this, leading to net cash of R$160.0m.

How Strong Is Kepler Weber's Balance Sheet?

According to the last reported balance sheet, Kepler Weber had liabilities of R$296.7m due within 12 months, and liabilities of R$40.8m due beyond 12 months. Offsetting these obligations, it had cash of R$210.8m as well as receivables valued at R$85.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$41.2m.

Since publicly traded Kepler Weber shares are worth a total of R$999.6m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Kepler Weber boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Kepler Weber grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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. Happily for any shareholders, Kepler Weber actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Kepler Weber has R$160.0m in net cash. And it impressed us with free cash flow of R$170m, being 128% of its EBIT. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign 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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This article by Simply Wall St is general in nature. 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.
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