Anima Holding (BVMF:ANIM3) Has A Pretty Healthy Balance Sheet

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Anima Holding S.A. (BVMF:ANIM3) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Anima Holding

What Is Anima Holding's Net Debt?

As you can see below, at the end of December 2020, Anima Holding had R$888.7m of debt, up from R$831.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds R$1.28b in cash, so it actually has R$389.1m net cash.

How Strong Is Anima Holding's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Anima Holding had liabilities of R$441.0m due within 12 months and liabilities of R$1.61b due beyond that. On the other hand, it had cash of R$1.28b and R$349.5m worth of receivables due within a year. So it has liabilities totalling R$428.6m more than its cash and near-term receivables, combined.

Of course, Anima Holding has a market capitalization of R$4.33b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Anima Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, Anima Holding's EBIT launched higher than Elon Musk, gaining a whopping 122% on last year. 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 Anima Holding 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Anima Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Anima Holding's free cash flow amounted to 23% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Anima Holding has R$389.1m in net cash. And it impressed us with its EBIT growth of 122% over the last year. So we don't have any problem with Anima Holding's use of debt. 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. For example, we've discovered 2 warning signs for Anima Holding that you should be aware of before investing here.

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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