Does Mills Locação Serviços e Logística (BVMF:MILS3) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Mills Locação, Serviços e Logística S.A. (BVMF:MILS3) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Mills Locação Serviços e Logística

What Is Mills Locação Serviços e Logística's Debt?

As you can see below, at the end of June 2022, Mills Locação Serviços e Logística had R$424.9m of debt, up from R$183.7m a year ago. Click the image for more detail. But on the other hand it also has R$450.9m in cash, leading to a R$26.1m net cash position.

A Look At Mills Locação Serviços e Logística's Liabilities

Zooming in on the latest balance sheet data, we can see that Mills Locação Serviços e Logística had liabilities of R$213.3m due within 12 months and liabilities of R$461.1m due beyond that. Offsetting this, it had R$450.9m in cash and R$213.2m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Mills Locação Serviços e Logística's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the R$2.89b company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Mills Locação Serviços e Logística also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Mills Locação Serviços e Logística grew its EBIT by 159% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is Mills Locação Serviços e Logística's earnings that will influence how the balance sheet holds up in the future. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Mills Locação Serviços e Logística 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, Mills Locação Serviços e Logística produced sturdy free cash flow equating to 69% 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 Mills Locação Serviços e Logística's liabilities, but we can be reassured by the fact it has has net cash of R$26.1m. And we liked the look of last year's 159% year-on-year EBIT growth. So is Mills Locação Serviços e Logística'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. Be aware that Mills Locação Serviços e Logística is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.