Is Lupatech (BVMF:LUPA3) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. As with many other companies Lupatech S.A. (BVMF:LUPA3) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Lupatech

What Is Lupatech's Net Debt?

The image below, which you can click on for greater detail, shows that Lupatech had debt of R$129.0m at the end of March 2021, a reduction from R$165.4m over a year. However, it also had R$34.4m in cash, and so its net debt is R$94.6m.

A Look At Lupatech's Liabilities

Zooming in on the latest balance sheet data, we can see that Lupatech had liabilities of R$81.8m due within 12 months and liabilities of R$279.1m due beyond that. Offsetting this, it had R$34.4m in cash and R$49.1m in receivables that were due within 12 months. So its liabilities total R$277.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the R$153.2m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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 you can't view debt in total isolation; since Lupatech will need earnings to service that debt. 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 54%, to R$59m. 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$56m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through R$12m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 5 warning signs for Lupatech (of which 1 can't be ignored!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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