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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that BK Brasil Operação e Assessoria a Restaurantes S.A. (BVMF:BKBR3) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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?

As you can see below, BK Brasil Operação e Assessoria a Restaurantes had R$825.0m of debt at June 2021, down from R$932.8m a year prior. On the flip side, it has R$507.0m in cash leading to net debt of about R$318.1m.

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

We can see from the most recent balance sheet that BK Brasil Operação e Assessoria a Restaurantes had liabilities of R$606.6m falling due within a year, and liabilities of R$1.46b due beyond that. Offsetting these obligations, it had cash of R$507.0m as well as receivables valued at R$153.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$1.40b.

BK Brasil Operação e Assessoria a Restaurantes has a market capitalization of R$2.40b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without 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's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

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$300m 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$317m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for BK Brasil Operação e Assessoria a Restaurantes 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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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.
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