WEG (BVMF:WEGE3) Seems To Use Debt Rather Sparingly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 WEG S.A. (BVMF:WEGE3) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does WEG Carry?

As you can see below, WEG had R$2.58b of debt at June 2025, down from R$4.18b a year prior. But it also has R$5.67b in cash to offset that, meaning it has R$3.08b net cash.

How Strong Is WEG's Balance Sheet?

According to the last reported balance sheet, WEG had liabilities of R$14.3b due within 12 months, and liabilities of R$2.43b due beyond 12 months. On the other hand, it had cash of R$5.67b and R$8.40b worth of receivables due within a year. So it has liabilities totalling R$2.62b more than its cash and near-term receivables, combined.

This state of affairs indicates that WEG's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the R$153.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, WEG also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for WEG

And we also note warmly that WEG grew its EBIT by 19% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine WEG's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While WEG 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. During the last three years, WEG 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

While it is always sensible to look at a company's total liabilities, it is very reassuring that WEG has R$3.08b in net cash. And it impressed us with its EBIT growth of 19% over the last year. So we don't think WEG's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in WEG, you may well want to click here to check an interactive graph of its earnings per share history.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.