Health Check: How Prudently Does International Meal Company Alimentação (BVMF:MEAL3) Use 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies International Meal Company Alimentação S.A. (BVMF:MEAL3) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for International Meal Company Alimentação

What Is International Meal Company Alimentação's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 International Meal Company Alimentação had R$677.6m of debt, an increase on R$568.4m, over one year. However, because it has a cash reserve of R$523.8m, its net debt is less, at about R$153.8m.

How Healthy Is International Meal Company Alimentação's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that International Meal Company Alimentação had liabilities of R$398.6m due within 12 months and liabilities of R$1.16b due beyond that. Offsetting these obligations, it had cash of R$523.8m as well as receivables valued at R$124.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$909.7m.

When you consider that this deficiency exceeds the company's R$827.8m market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine International Meal Company Alimentação'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, International Meal Company Alimentação reported revenue of R$1.4b, which is a gain of 3.5%, 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

Over the last twelve months International Meal Company Alimentação produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping R$98m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through R$42m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with International Meal Company Alimentação , and understanding them should be part of your investment process.

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.

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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