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

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. Importantly, Companhia Brasileira De Distribuicao (BVMF:PCAR3) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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$6.63b of debt at March 2023, down from R$8.53b a year prior. However, it does have R$3.52b in cash offsetting this, leading to net debt of about R$3.12b.

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

According to the last reported balance sheet, Companhia Brasileira De Distribuicao had liabilities of R$16.7b due within 12 months, and liabilities of R$13.1b due beyond 12 months. On the other hand, it had cash of R$3.52b and R$1.65b worth of receivables due within a year. So it has liabilities totalling R$24.6b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the R$4.32b 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. After all, Companhia Brasileira De Distribuicao would likely require a major re-capitalisation if it had to pay its creditors today. 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 Companhia Brasileira De Distribuicao can strengthen its balance sheet over time. 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 73%, to R$18b. With any luck the company will be able to grow its way to profitability.

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$10m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of R$1.2b in the last year. So while it's not wise to assume the company will fail, we do think it's risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Companhia Brasileira De Distribuicao's profit, revenue, and operating cashflow have changed over the last few years.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.