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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 is this debt a concern to shareholders?

When Is Debt A Problem?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Enauta Participações

How Much Debt Does Enauta Participações Carry?

You can click the graphic below for the historical numbers, but it shows that Enauta Participações had R$135.1m of debt in June 2022, down from R$188.7m, one year before. But it also has R$1.64b in cash to offset that, meaning it has R$1.50b net cash.

How Strong Is Enauta Participações' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Enauta Participações had liabilities of R$889.5m due within 12 months and liabilities of R$1.18b due beyond that. Offsetting these obligations, it had cash of R$1.64b as well as receivables valued at R$595.3m due within 12 months. So it can boast R$164.0m 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.

Even more impressive was the fact that Enauta Participações grew its EBIT by 311% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the last three years, Enauta Participações actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Enauta Participações has R$1.50b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of R$492m, being 151% of its EBIT. So is Enauta Participações's debt a risk? It doesn't seem so to us. 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. We've identified 3 warning signs with Enauta Participações (at least 1 which is a bit concerning) , and understanding them should be part of your investment process.

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. 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.