Is Lupatech (BVMF:LUPA3) A Risky Investment?

Warren Buffett famously said, '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. As with many other companies Lupatech S.A. (BVMF:LUPA3) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Lupatech

What Is Lupatech's Debt?

As you can see below, Lupatech had R$133.4m of debt, at March 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have R$19.0m in cash offsetting this, leading to net debt of about R$114.4m.

How Strong Is Lupatech's Balance Sheet?

The latest balance sheet data shows that Lupatech had liabilities of R$97.1m due within a year, and liabilities of R$271.7m falling due after that. Offsetting these obligations, it had cash of R$19.0m as well as receivables valued at R$120.5m due within 12 months. So it has liabilities totalling R$229.4m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the R$122.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Lupatech would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Lupatech's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Lupatech wasn't profitable at an EBIT level, but managed to grow its revenue by 76%, to R$105m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Lupatech still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping R$33m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through R$56m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 6 warning signs for Lupatech (3 can't be ignored!) that you should be aware of before investing here.

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.