Does Allpark Empreendimentos Participações e Serviços (BVMF:ALPK3) Have A Healthy Balance Sheet?

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 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. We can see that Allpark Empreendimentos, Participações e Serviços S.A. (BVMF:ALPK3) does use debt in its business. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

View our latest analysis for Allpark Empreendimentos Participações e Serviços

What Is Allpark Empreendimentos Participações e Serviços's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Allpark Empreendimentos Participações e Serviços had debt of R$1.01b, up from R$794.6m in one year. However, it also had R$306.6m in cash, and so its net debt is R$707.4m.

A Look At Allpark Empreendimentos Participações e Serviços' Liabilities

According to the last reported balance sheet, Allpark Empreendimentos Participações e Serviços had liabilities of R$698.3m due within 12 months, and liabilities of R$1.62b due beyond 12 months. On the other hand, it had cash of R$306.6m and R$118.2m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$1.89b.

This deficit casts a shadow over the R$1.06b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Allpark Empreendimentos Participações e Serviços would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While Allpark Empreendimentos Participações e Serviços's debt to EBITDA ratio (2.6) suggests that it uses some debt, its interest cover is very weak, at 0.71, suggesting high leverage. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. The silver lining is that Allpark Empreendimentos Participações e Serviços grew its EBIT by 149% last year, which nourishing like the idealism of youth. If it can keep walking that path it will be in a position to shed its debt with relative ease. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Allpark Empreendimentos Participações e Serviços's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Allpark Empreendimentos Participações e Serviços recorded free cash flow of 49% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

On the face of it, Allpark Empreendimentos Participações e Serviços's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at growing its EBIT; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Allpark Empreendimentos Participações e Serviços stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Allpark Empreendimentos Participações e Serviços (of which 2 can't be ignored!) you should know about.

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. 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.