Vivara Participações (BVMF:VIVA3) Could Easily Take On More Debt

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, Vivara Participações S.A. (BVMF:VIVA3) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Vivara Participações

What Is Vivara Participações's Net Debt?

The image below, which you can click on for greater detail, shows that Vivara Participações had debt of R$286.8m at the end of June 2021, a reduction from R$320.5m over a year. But on the other hand it also has R$430.0m in cash, leading to a R$143.2m net cash position.

How Healthy Is Vivara Participações' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Vivara Participações had liabilities of R$457.9m due within 12 months and liabilities of R$460.8m due beyond that. Offsetting this, it had R$430.0m in cash and R$427.4m in receivables that were due within 12 months. So it has liabilities totalling R$61.4m more than its cash and near-term receivables, combined.

Having regard to Vivara Participações' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the R$6.25b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Vivara Participações also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Vivara Participações has boosted its EBIT by 64%, thus reducing the spectre of future debt repayments. 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. During the last three years, Vivara Participações produced sturdy free cash flow equating to 55% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Vivara Participações has R$143.2m in net cash. And we liked the look of last year's 64% year-on-year EBIT growth. So is Vivara Participações's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. 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 2 warning signs 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.

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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