Is BK Brasil Operação e Assessoria a Restaurantes (BVMF:BKBR3) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, BK Brasil Operação e Assessoria a Restaurantes S.A. (BVMF:BKBR3) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for BK Brasil Operação e Assessoria a Restaurantes

What Is BK Brasil Operação e Assessoria a Restaurantes's Net Debt?

As you can see below, BK Brasil Operação e Assessoria a Restaurantes had R$790.3m of debt at December 2021, down from R$830.8m a year prior. However, because it has a cash reserve of R$450.8m, its net debt is less, at about R$339.5m.

How Strong Is BK Brasil Operação e Assessoria a Restaurantes' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BK Brasil Operação e Assessoria a Restaurantes had liabilities of R$761.4m due within 12 months and liabilities of R$1.48b due beyond that. On the other hand, it had cash of R$450.8m and R$215.6m worth of receivables due within a year. So it has liabilities totalling R$1.57b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of R$1.74b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine BK Brasil Operação e Assessoria a Restaurantes'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 BK Brasil Operação e Assessoria a Restaurantes wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to R$2.8b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though BK Brasil Operação e Assessoria a Restaurantes managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost R$160m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled R$152m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. For riskier companies like BK Brasil Operação e Assessoria a Restaurantes I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.