Is BRF (BVMF:BRFS3) Using Debt In A Risky Way?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that BRF S.A. (BVMF:BRFS3) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for BRF

What Is BRF's Debt?

The image below, which you can click on for greater detail, shows that BRF had debt of R$22.6b at the end of September 2023, a reduction from R$25.6b over a year. On the flip side, it has R$11.4b in cash leading to net debt of about R$11.1b.

A Look At BRF's Liabilities

Zooming in on the latest balance sheet data, we can see that BRF had liabilities of R$22.2b due within 12 months and liabilities of R$22.1b due beyond that. On the other hand, it had cash of R$11.4b and R$5.74b worth of receivables due within a year. So it has liabilities totalling R$27.2b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's R$23.1b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if BRF can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year BRF wasn't profitable at an EBIT level, but managed to grow its revenue by 2.3%, to R$54b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, BRF had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at R$521m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of R$3.7b. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for BRF (2 are significant!) that you should be aware of before investing here.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.