Atacadão (BVMF:CRFB3) Seems To Use Debt Quite Sensibly

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.' 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 Atacadão S.A. (BVMF:CRFB3) makes use of 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Atacadão

How Much Debt Does Atacadão Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Atacadão had R$3.92b of debt, an increase on R$2.86b, over one year. But on the other hand it also has R$5.67b in cash, leading to a R$1.75b net cash position.

How Strong Is Atacadão's Balance Sheet?

We can see from the most recent balance sheet that Atacadão had liabilities of R$24.7b falling due within a year, and liabilities of R$10.1b due beyond that. Offsetting these obligations, it had cash of R$5.67b as well as receivables valued at R$2.39b due within 12 months. So it has liabilities totalling R$26.7b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of R$37.9b, so it does suggest shareholders should keep an eye on Atacadão's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Atacadão also has more cash than debt, so we're pretty confident it can manage its debt safely.

Another good sign is that Atacadão has been able to increase its EBIT by 21% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Atacadão can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Atacadão 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, Atacadão's free cash flow amounted to 25% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While Atacadão does have more liabilities than liquid assets, it also has net cash of R$1.75b. And it impressed us with its EBIT growth of 21% over the last year. So we are not troubled with Atacadão'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 Atacadão's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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