Is BK Brasil Operação e Assessoria a Restaurantes (BVMF:BKBR3) Using Debt Sensibly?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that BK Brasil Operação e Assessoria a Restaurantes S.A. (BVMF:BKBR3) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

Check out 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$832.7m of debt at September 2021, down from R$937.8m a year prior. However, it does have R$485.8m in cash offsetting this, leading to net debt of about R$346.9m.

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$686.1m due within 12 months and liabilities of R$1.48b due beyond that. On the other hand, it had cash of R$485.8m and R$178.3m worth of receivables due within a year. So its liabilities total R$1.50b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of R$1.81b. 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 ultimately the future profitability of the business will decide if BK Brasil Operação e Assessoria a Restaurantes 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.

Over 12 months, BK Brasil Operação e Assessoria a Restaurantes reported revenue of R$2.6b, which is a gain of 15%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, BK Brasil Operação e Assessoria a Restaurantes had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable R$209m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through R$210m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for BK Brasil Operação e Assessoria a Restaurantes you should know about.

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.