We Think Unicasa Indústria de Móveis (BVMF:UCAS3) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Unicasa Indústria de Móveis S.A. (BVMF:UCAS3) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Unicasa Indústria de Móveis

What Is Unicasa Indústria de Móveis's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Unicasa Indústria de Móveis had debt of R$17.1m, up from none in one year. However, its balance sheet shows it holds R$55.6m in cash, so it actually has R$38.6m 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$64.9m falling due within a year, and liabilities of R$21.2m due beyond that. Offsetting this, it had R$55.6m in cash and R$29.0m in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

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$255.8m 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 161% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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. While Unicasa Indústria de Móveis 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. Happily for any shareholders, Unicasa Indústria de Móveis actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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$38.6m in net cash. The cherry on top was that in converted 111% of that EBIT to free cash flow, bringing in R$36m. So is Unicasa Indústria de Móveis's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Unicasa Indústria de Móveis has 3 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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