Unicasa Indústria de Móveis (BVMF:UCAS3) Has A Rock Solid 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.' 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. Importantly, Unicasa Indústria de Móveis S.A. (BVMF:UCAS3) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Unicasa Indústria de Móveis

How Much Debt Does Unicasa Indústria de Móveis Carry?

The image below, which you can click on for greater detail, shows that at March 2021 Unicasa Indústria de Móveis had debt of R$17.0m, up from none in one year. However, its balance sheet shows it holds R$81.8m in cash, so it actually has R$64.7m net cash.

A Look At Unicasa Indústria de Móveis' Liabilities

We can see from the most recent balance sheet that Unicasa Indústria de Móveis had liabilities of R$73.9m falling due within a year, and liabilities of R$22.0m due beyond that. Offsetting this, it had R$81.8m in cash and R$30.4m in receivables that were due within 12 months. So it actually has R$16.3m more liquid assets than total liabilities.

This short term liquidity is a sign that Unicasa Indústria de Móveis could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Unicasa Indústria de Móveis has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Unicasa Indústria de Móveis grew its EBIT by 53% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Unicasa Indústria de Móveis'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Unicasa Indústria de Móveis 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. Over the last three years, Unicasa Indústria de Móveis actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Unicasa Indústria de Móveis has R$64.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of R$40m, being 158% of its EBIT. So we don't think Unicasa Indústria de Móveis's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Unicasa Indústria de Móveis has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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