We Think Kepler Weber (BVMF:KEPL3) Can Stay On Top Of Its Debt

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 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?

When Is Debt Dangerous?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Kepler Weber

What Is Kepler Weber's Net Debt?

As you can see below, Kepler Weber had R$51.6m of debt at June 2020, down from R$61.0m a year prior. But it also has R$132.5m in cash to offset that, meaning it has R$80.9m 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$202.9m due within 12 months and liabilities of R$34.1m due beyond that. On the other hand, it had cash of R$132.5m and R$59.5m worth of receivables due within a year. So it has liabilities totalling R$45.0m more than its cash and near-term receivables, combined.

Of course, Kepler Weber has a market capitalization of R$1.13b, 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.

Fortunately, Kepler Weber grew its EBIT by 9.2% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Kepler Weber's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Kepler Weber may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last two years, Kepler Weber produced sturdy free cash flow equating to 64% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

We could understand if investors are concerned about Kepler Weber's liabilities, but we can be reassured by the fact it has has net cash of R$80.9m. 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. For example, we've discovered 2 warning signs for Kepler Weber that you should be aware of before investing here.

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. 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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