We Think Vivara Participações (BVMF:VIVA3) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Vivara Participações S.A. (BVMF:VIVA3) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View 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 as of December 2023 Vivara Participações had R$271.5m of debt, an increase on R$225.2m, over one year. However, its balance sheet shows it holds R$304.5m in cash, so it actually has R$33.0m net cash.

A Look At Vivara Participações' Liabilities

We can see from the most recent balance sheet that Vivara Participações had liabilities of R$695.6m falling due within a year, and liabilities of R$612.3m due beyond that. Offsetting this, it had R$304.5m in cash and R$949.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$54.2m.

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$5.70b company is short on cash, but still worth keeping an eye on the 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.

And we also note warmly that Vivara Participações grew its EBIT by 18% last year, making its debt load easier to handle. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, Vivara Participações created free cash flow amounting to 5.7% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish 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$33.0m in net cash. And we liked the look of last year's 18% year-on-year EBIT growth. So we are not troubled with Vivara Participações's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Vivara Participações's earnings per share history for free.

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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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.