Does Enauta Participações (BVMF:ENAT3) Have A Healthy 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. We can see that Enauta Participações S.A. (BVMF:ENAT3) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Enauta Participações

What Is Enauta Participações's Debt?

You can click the graphic below for the historical numbers, but it shows that Enauta Participações had R$174.8m of debt in September 2021, down from R$224.4m, one year before. But on the other hand it also has R$2.38b in cash, leading to a R$2.20b net cash position.

A Look At Enauta Participações' Liabilities

The latest balance sheet data shows that Enauta Participações had liabilities of R$831.7m due within a year, and liabilities of R$1.50b falling due after that. On the other hand, it had cash of R$2.38b and R$396.9m worth of receivables due within a year. So it can boast R$446.9m more liquid assets than total liabilities.

This surplus suggests that Enauta Participações has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Enauta Participações has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Enauta Participações saw its EBIT drop by 3.4% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Enauta Participações'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Enauta Participações may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Enauta Participações actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Enauta Participações has net cash of R$2.20b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of R$777m, being 267% of its EBIT. So we don't think Enauta Participações's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Enauta Participações is showing 3 warning signs in our investment analysis , and 1 of those is significant...

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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