Vivara Participações (BVMF:VIVA3) Has A Pretty Healthy Balance Sheet

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 the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Vivara Participações

What Is Vivara Participações's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Vivara Participações had R$390.3m of debt, an increase on R$270.4m, over one year. However, it does have R$537.0m in cash offsetting this, leading to net cash of R$146.7m.

How Healthy Is Vivara Participações' Balance Sheet?

The latest balance sheet data shows that Vivara Participações had liabilities of R$589.0m due within a year, and liabilities of R$380.2m falling due after that. Offsetting these obligations, it had cash of R$537.0m as well as receivables valued at R$511.3m due within 12 months. So it actually has R$79.1m more liquid assets than total liabilities.

This state of affairs indicates that Vivara Participações' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the R$6.03b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Vivara Participações boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Vivara Participações if management cannot prevent a repeat of the 57% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Vivara Participações can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Vivara Participações 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. In the last three years, Vivara Participações's free cash flow amounted to 41% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Vivara Participações has net cash of R$146.7m, as well as more liquid assets than liabilities. So we are not troubled with Vivara Participações's debt use. 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 - Vivara Participações has 1 warning sign 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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