Would BK Brasil Operação e Assessoria a Restaurantes (BVMF:BKBR3) Be Better Off With Less Debt?

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 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. We can see that BK Brasil Operação e Assessoria a Restaurantes S.A. (BVMF:BKBR3) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

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

How Much Debt Does BK Brasil Operação e Assessoria a Restaurantes Carry?

The image below, which you can click on for greater detail, shows that at December 2020 BK Brasil Operação e Assessoria a Restaurantes had debt of R$830.8m, up from R$519.9m in one year. However, it also had R$795.5m in cash, and so its net debt is R$35.3m.

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$564.5m due within 12 months and liabilities of R$1.53b due beyond that. On the other hand, it had cash of R$795.5m and R$169.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$1.13b.

This deficit isn't so bad because BK Brasil Operação e Assessoria a Restaurantes is worth R$2.60b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Carrying virtually no net debt, BK Brasil Operação e Assessoria a Restaurantes has a very light debt load indeed. 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.

Over 12 months, BK Brasil Operação e Assessoria a Restaurantes made a loss at the EBIT level, and saw its revenue drop to R$2.2b, which is a fall of 22%. That makes us nervous, to say the least.

Caveat Emptor

Not only did BK Brasil Operação e Assessoria a Restaurantes's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable R$334m at the EBIT level. 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. 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$452m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For instance, we've identified 1 warning sign for BK Brasil Operação e Assessoria a Restaurantes that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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