Is Lupatech (BVMF:LUPA3) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Lupatech S.A. (BVMF:LUPA3) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Lupatech

How Much Debt Does Lupatech Carry?

The image below, which you can click on for greater detail, shows that at September 2022 Lupatech had debt of R$145.7m, up from R$138.5m in one year. However, it does have R$19.2m in cash offsetting this, leading to net debt of about R$126.5m.

How Healthy Is Lupatech's Balance Sheet?

According to the last reported balance sheet, Lupatech had liabilities of R$104.6m due within 12 months, and liabilities of R$286.8m due beyond 12 months. Offsetting this, it had R$19.2m in cash and R$123.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$249.1m.

This deficit casts a shadow over the R$114.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Lupatech would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. 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 42%, to R$116m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Lupatech's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Its EBIT loss was a whopping R$30m. When we look at that alongside the significant liabilities, we're not particularly confident 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$51m in negative free cash flow over the last year. That means it's on the risky side of things. 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. For example, we've discovered 4 warning signs for Lupatech (2 are a bit concerning!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.