Smartfit Escola de Ginástica e Dança (BVMF:SMFT3) Has A Somewhat Strained Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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, Smartfit Escola de Ginástica e Dança S.A. (BVMF:SMFT3) does carry debt. But the real question is whether this debt is making the company risky.

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Smartfit Escola de Ginástica e Dança's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2025 Smartfit Escola de Ginástica e Dança had debt of R$5.94b, up from R$4.07b in one year. However, because it has a cash reserve of R$2.95b, its net debt is less, at about R$2.99b.

How Strong Is Smartfit Escola de Ginástica e Dança's Balance Sheet?

The latest balance sheet data shows that Smartfit Escola de Ginástica e Dança had liabilities of R$2.71b due within a year, and liabilities of R$10.0b falling due after that. Offsetting these obligations, it had cash of R$2.95b as well as receivables valued at R$1.20b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$8.56b.

This deficit is considerable relative to its market capitalization of R$12.6b, so it does suggest shareholders should keep an eye on Smartfit Escola de Ginástica e Dança's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

See our latest analysis for Smartfit Escola de Ginástica e Dança

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

While Smartfit Escola de Ginástica e Dança has a quite reasonable net debt to EBITDA multiple of 1.5, its interest cover seems weak, at 1.7. This does suggest the company is paying fairly high interest rates. Either way there's no doubt the stock is using meaningful leverage. We note that Smartfit Escola de Ginástica e Dança grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Smartfit Escola de Ginástica e Dança can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last three years, Smartfit Escola de Ginástica e Dança saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

On the face of it, Smartfit Escola de Ginástica e Dança's interest cover left us tentative about the stock, and its conversion of EBIT to free cash flow was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at growing its EBIT; that's encouraging. Once we consider all the factors above, together, it seems to us that Smartfit Escola de Ginástica e Dança's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Smartfit Escola de Ginástica e Dança has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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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.