Unicasa Indústria de Móveis (BVMF:UCAS3) Seems To Use Debt Rather Sparingly

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. As with many other companies Unicasa Indústria de Móveis S.A. (BVMF:UCAS3) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Unicasa Indústria de Móveis

What Is Unicasa Indústria de Móveis's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Unicasa Indústria de Móveis had R$15.9m of debt, an increase on none, over one year. However, its balance sheet shows it holds R$73.0m in cash, so it actually has R$57.1m net cash.

How Healthy Is Unicasa Indústria de Móveis' Balance Sheet?

We can see from the most recent balance sheet that Unicasa Indústria de Móveis had liabilities of R$85.6m falling due within a year, and liabilities of R$20.2m due beyond that. Offsetting this, it had R$73.0m in cash and R$30.6m in receivables that were due within 12 months. So it has liabilities totalling R$2.20m more than its cash and near-term receivables, combined.

Having regard to Unicasa Indústria de Móveis' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the R$259.7m company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Unicasa Indústria de Móveis boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Unicasa Indústria de Móveis grew its EBIT by 135% 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 you can't view debt in total isolation; since Unicasa Indústria de Móveis will need earnings to service that debt. 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. 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 look at a company's total liabilities, it is very reassuring that Unicasa Indústria de Móveis has R$57.1m in net cash. The cherry on top was that in converted 149% of that EBIT to free cash flow, bringing in R$43m. So we don't think Unicasa Indústria de Móveis's use of debt is risky. 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. For example, we've discovered 2 warning signs for Unicasa Indústria de Móveis that you should be aware of before investing here.

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.