Here's Why International Meal Company Alimentação (BVMF:MEAL3) Can Afford Some 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. We note that International Meal Company Alimentação S.A. (BVMF:MEAL3) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for International Meal Company Alimentação

How Much Debt Does International Meal Company Alimentação Carry?

As you can see below, at the end of September 2020, International Meal Company Alimentação had R$571.4m of debt, up from R$518.0m a year ago. Click the image for more detail. However, because it has a cash reserve of R$532.8m, its net debt is less, at about R$38.6m.

A Look At International Meal Company Alimentação's Liabilities

The latest balance sheet data shows that International Meal Company Alimentação had liabilities of R$410.8m due within a year, and liabilities of R$1.02b falling due after that. Offsetting these obligations, it had cash of R$532.8m as well as receivables valued at R$125.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$772.3m.

This is a mountain of leverage relative to its market capitalization of R$1.05b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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.

In the last year International Meal Company Alimentação had a loss before interest and tax, and actually shrunk its revenue by 21%, to R$1.2b. That makes us nervous, to say the least.

Caveat Emptor

While International Meal Company Alimentação's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping R$162m. 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$149m 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. To that end, you should be aware of the 1 warning sign we've spotted with International Meal Company Alimentação .

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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