Is Enauta Participações (BVMF:ENAT3) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Enauta Participações S.A. (BVMF:ENAT3) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Enauta Participações

How Much Debt Does Enauta Participações Carry?

As you can see below, Enauta Participações had R$174.8m of debt at September 2021, down from R$224.4m a year prior. However, its balance sheet shows it holds R$2.38b in cash, so it actually has R$2.20b net cash.

How Healthy Is Enauta Participações' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Enauta Participações had liabilities of R$831.7m due within 12 months and liabilities of R$1.50b due beyond 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 short term liquidity is a sign that Enauta Participações could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Enauta Participações boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that Enauta Participações saw its EBIT decline by 3.4% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. 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 Enauta Participações can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, Enauta Participações actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While it is always sensible to investigate a company's debt, in this case Enauta Participações has R$2.20b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 267% of that EBIT to free cash flow, bringing in R$777m. So is Enauta Participações's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Enauta Participações (of which 1 is concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.