Is d1000 Varejo Farma Participações (BVMF:DMVF3) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that d1000 Varejo Farma Participações S.A. (BVMF:DMVF3) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for d1000 Varejo Farma Participações

How Much Debt Does d1000 Varejo Farma Participações Carry?

You can click the graphic below for the historical numbers, but it shows that d1000 Varejo Farma Participações had R$21.6m of debt in September 2024, down from R$26.8m, one year before. But on the other hand it also has R$39.2m in cash, leading to a R$17.6m net cash position.

How Strong Is d1000 Varejo Farma Participações' Balance Sheet?

According to the last reported balance sheet, d1000 Varejo Farma Participações had liabilities of R$479.5m due within 12 months, and liabilities of R$348.1m due beyond 12 months. On the other hand, it had cash of R$39.2m and R$236.1m worth of receivables due within a year. So it has liabilities totalling R$552.3m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the R$305.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, d1000 Varejo Farma Participações would likely require a major re-capitalisation if it had to pay its creditors today. d1000 Varejo Farma Participações boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

It is well worth noting that d1000 Varejo Farma Participações's EBIT shot up like bamboo after rain, gaining 67% in the last twelve months. That'll make it easier to manage its 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 d1000 Varejo Farma Participações's ability to maintain a healthy balance sheet going forward. 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 d1000 Varejo Farma 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. Over the last three years, d1000 Varejo Farma Participações actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although d1000 Varejo Farma Participações's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of R$17.6m. And it impressed us with free cash flow of R$81m, being 161% of its EBIT. So we are not troubled with d1000 Varejo Farma Participações's debt use. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with d1000 Varejo Farma Participações .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.