Is Enauta Participações (BVMF:ENAT3) Using Debt Sensibly?

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 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Enauta Participações

What Is Enauta Participações's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Enauta Participações had R$121.8m of debt in September 2022, down from R$174.8m, one year before. But on the other hand it also has R$1.55b in cash, leading to a R$1.43b net cash position.

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$1.07b due within 12 months and liabilities of R$1.04b due beyond that. Offsetting these obligations, it had cash of R$1.55b as well as receivables valued at R$147.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$411.5m.

Of course, Enauta Participações has a market capitalization of R$3.71b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Enauta Participações also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Enauta Participações reported revenue of R$2.2b, which is a gain of 69%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Enauta Participações?

Although Enauta Participações had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of R$892m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The good news for Enauta Participações shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock 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. For instance, we've identified 4 warning signs for Enauta Participações (2 are a bit unpleasant) you should be aware of.

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.

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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.