Is Companhia Brasileira De Distribuicao (BVMF:PCAR3) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Companhia Brasileira De Distribuicao (BVMF:PCAR3) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Companhia Brasileira De Distribuicao

What Is Companhia Brasileira De Distribuicao's Net Debt?

As you can see below, Companhia Brasileira De Distribuicao had R$6.35b of debt at June 2023, down from R$8.70b a year prior. However, because it has a cash reserve of R$3.22b, its net debt is less, at about R$3.13b.

How Healthy Is Companhia Brasileira De Distribuicao's Balance Sheet?

We can see from the most recent balance sheet that Companhia Brasileira De Distribuicao had liabilities of R$18.1b falling due within a year, and liabilities of R$12.5b due beyond that. Offsetting this, it had R$3.22b in cash and R$1.71b in receivables that were due within 12 months. So it has liabilities totalling R$25.8b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the R$5.18b 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 definitely think shareholders need to watch this one closely. At the end of the day, Companhia Brasileira De Distribuicao would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Companhia Brasileira De Distribuicao wasn't profitable at an EBIT level, but managed to grow its revenue by 249%, to R$18b. 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$67m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of R$1.4b in the last year. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Companhia Brasileira De Distribuicao you should be aware of.

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.