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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that BK Brasil Operação e Assessoria a Restaurantes S.A. (BVMF:BKBR3) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

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

The chart below, which you can click on for greater detail, shows that BK Brasil Operação e Assessoria a Restaurantes had R$798.1m in debt in March 2022; about the same as the year before. However, because it has a cash reserve of R$380.2m, its net debt is less, at about R$417.9m.

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

The latest balance sheet data shows that BK Brasil Operação e Assessoria a Restaurantes had liabilities of R$785.8m due within a year, and liabilities of R$1.41b falling due after that. Offsetting these obligations, it had cash of R$380.2m as well as receivables valued at R$239.2m due within 12 months. 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$1.69b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, BK Brasil Operação e Assessoria a Restaurantes reported revenue of R$3.0b, which is a gain of 39%, although it did not report any earnings before interest and tax. 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. To be specific the EBIT loss came in at R$34m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of R$143m into a profit. So to be blunt we do think it is 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 BK Brasil Operação e Assessoria a Restaurantes's profit, revenue, and operating cashflow have changed over the last few years.

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.