Does Anima Holding (BVMF:ANIM3) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Anima Holding S.A. (BVMF:ANIM3) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Anima Holding

How Much Debt Does Anima Holding Carry?

As you can see below, at the end of March 2021, Anima Holding had R$929.4m of debt, up from R$750.7m a year ago. Click the image for more detail. But on the other hand it also has R$1.22b in cash, leading to a R$294.0m net cash position.

A Look At Anima Holding's Liabilities

The latest balance sheet data shows that Anima Holding had liabilities of R$495.5m due within a year, and liabilities of R$1.90b falling due after that. Offsetting these obligations, it had cash of R$1.22b as well as receivables valued at R$372.3m due within 12 months. So it has liabilities totalling R$803.5m more than its cash and near-term receivables, combined.

Given Anima Holding has a market capitalization of R$4.45b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Anima Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Pleasingly, Anima Holding is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 358% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Anima Holding'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Anima Holding 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. Looking at the most recent three years, Anima Holding recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

Although Anima Holding'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$294.0m. And it impressed us with its EBIT growth of 358% 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 3 warning signs for Anima Holding that you should be aware of before investing here.

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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