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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Enauta Participações S.A. (BVMF:ENAT3) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Enauta Participações

What Is Enauta Participações's Debt?

As you can see below, Enauta Participações had R$148.2m of debt at March 2022, down from R$202.6m a year prior. But on the other hand it also has R$1.97b in cash, leading to a R$1.82b net cash position.

How Healthy Is Enauta Participações' Balance Sheet?

According to the last reported balance sheet, Enauta Participações had liabilities of R$1.03b due within 12 months, and liabilities of R$1.10b due beyond 12 months. On the other hand, it had cash of R$1.97b and R$430.5m worth of receivables due within a year. So it can boast R$268.9m 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!

Better yet, Enauta Participações grew its EBIT by 321% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Enauta Participações has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. 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$1.82b, as well as more liquid assets than liabilities. The cherry on top was that in converted 212% of that EBIT to free cash flow, bringing in R$734m. So is Enauta Participações's debt a risk? It doesn't seem so to us. 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. Case in point: We've spotted 4 warning signs for Enauta Participações you should be aware of, and 2 of them are significant.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.