Does Companhia Brasileira De Distribuicao (BVMF:PCAR3) Have A 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 Companhia Brasileira De Distribuicao (BVMF:PCAR3) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Companhia Brasileira De Distribuicao

How Much Debt Does Companhia Brasileira De Distribuicao Carry?

You can click the graphic below for the historical numbers, but it shows that Companhia Brasileira De Distribuicao had R$6.15b of debt in September 2023, down from R$8.12b, one year before. However, it also had R$3.74b in cash, and so its net debt is R$2.41b.

A Look At Companhia Brasileira De Distribuicao's Liabilities

The latest balance sheet data shows that Companhia Brasileira De Distribuicao had liabilities of R$6.03b due within a year, and liabilities of R$11.6b falling due after that. Offsetting these obligations, it had cash of R$3.74b as well as receivables valued at R$2.03b due within 12 months. So its liabilities total R$11.9b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the R$1.09b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Companhia Brasileira De Distribuicao would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Companhia Brasileira De Distribuicao'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.

Over 12 months, Companhia Brasileira De Distribuicao reported revenue of R$19b, which is a gain of 65,052%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Companhia Brasileira De Distribuicao still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at R$46m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost R$277m in the last year. So we think buying this stock is risky. 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. Be aware that Companhia Brasileira De Distribuicao is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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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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.