These 4 Measures Indicate That Technos (BVMF:TECN3) Is Using Debt Safely

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Technos S.A. (BVMF:TECN3) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Technos

What Is Technos's Net Debt?

The image below, which you can click on for greater detail, shows that Technos had debt of R$86.0m at the end of June 2024, a reduction from R$109.5m over a year. But it also has R$93.9m in cash to offset that, meaning it has R$7.94m net cash.

A Look At Technos' Liabilities

We can see from the most recent balance sheet that Technos had liabilities of R$79.8m falling due within a year, and liabilities of R$155.2m due beyond that. Offsetting these obligations, it had cash of R$93.9m as well as receivables valued at R$179.0m due within 12 months. So it can boast R$37.9m more liquid assets than total liabilities.

This surplus suggests that Technos has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Technos has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Technos grew its EBIT by 14% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But it is Technos'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Technos 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. Over the most recent three years, Technos recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Technos has net cash of R$7.94m, as well as more liquid assets than liabilities. And it also grew its EBIT by 14% over the last year. So we don't think Technos's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Technos you should be aware of.

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.