These 4 Measures Indicate That Vivara Participações (BVMF:VIVA3) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Vivara Participações S.A. (BVMF:VIVA3) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Vivara Participações

How Much Debt Does Vivara Participações Carry?

You can click the graphic below for the historical numbers, but it shows that Vivara Participações had R$221.9m of debt in March 2023, down from R$285.5m, one year before. But it also has R$291.6m in cash to offset that, meaning it has R$69.6m net cash.

How Healthy Is Vivara Participações' Balance Sheet?

We can see from the most recent balance sheet that Vivara Participações had liabilities of R$648.3m falling due within a year, and liabilities of R$541.8m due beyond that. Offsetting these obligations, it had cash of R$291.6m as well as receivables valued at R$572.6m due within 12 months. So it has liabilities totalling R$325.9m more than its cash and near-term receivables, combined.

Of course, Vivara Participações has a market capitalization of R$5.68b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Vivara Participações boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Vivara Participações grew its EBIT at 13% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Vivara Participações's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Vivara Participações 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. Looking at the most recent three years, Vivara Participações recorded free cash flow of 22% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Vivara Participações has R$69.6m in net cash. And it also grew its EBIT by 13% over the last year. So we don't have any problem with Vivara Participações's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 1 warning sign for Vivara Participações you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.