Is International Meal Company Alimentação (BVMF:MEAL3) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, International Meal Company Alimentação S.A. (BVMF:MEAL3) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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.

Check out our latest analysis for International Meal Company Alimentação

What Is International Meal Company Alimentação's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 International Meal Company Alimentação had debt of R$571.4m, up from R$518.0m in one year. However, it does have R$532.8m in cash offsetting this, leading to net debt of about R$38.6m.

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

We can see from the most recent balance sheet that International Meal Company Alimentação had liabilities of R$410.8m falling due within a year, and liabilities of R$1.02b due beyond that. Offsetting these obligations, it had cash of R$532.8m as well as receivables valued at R$104.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$792.6m.

This is a mountain of leverage relative to its market capitalization of R$879.2m. 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 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 made a loss at the EBIT level, and saw its revenue drop to R$1.2b, which is a fall of 21%. That makes us nervous, to say the least.

Caveat Emptor

Not only did International Meal Company Alimentação'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$128m 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$149m 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. However, not all investment risk resides within the balance sheet - far from it. For example International Meal Company Alimentação has 2 warning signs (and 1 which is concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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