Does M. Dias Branco Indústria e Comércio de Alimentos (BVMF:MDIA3) Have A Healthy Balance Sheet?

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 M. Dias Branco S.A. Indústria e Comércio de Alimentos (BVMF:MDIA3) makes use of debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for M. Dias Branco Indústria e Comércio de Alimentos

What Is M. Dias Branco Indústria e Comércio de Alimentos's Net Debt?

You can click the graphic below for the historical numbers, but it shows that M. Dias Branco Indústria e Comércio de Alimentos had R$1.94b of debt in March 2022, down from R$2.13b, one year before. However, because it has a cash reserve of R$862.4m, its net debt is less, at about R$1.07b.

A Look At M. Dias Branco Indústria e Comércio de Alimentos' Liabilities

We can see from the most recent balance sheet that M. Dias Branco Indústria e Comércio de Alimentos had liabilities of R$1.44b falling due within a year, and liabilities of R$2.22b due beyond that. On the other hand, it had cash of R$862.4m and R$1.58b worth of receivables due within a year. So it has liabilities totalling R$1.21b more than its cash and near-term receivables, combined.

Of course, M. Dias Branco Indústria e Comércio de Alimentos has a market capitalization of R$9.31b, 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.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

M. Dias Branco Indústria e Comércio de Alimentos has a low debt to EBITDA ratio of only 1.5. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. But the bad news is that M. Dias Branco Indústria e Comércio de Alimentos has seen its EBIT plunge 14% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 M. Dias Branco Indústria e Comércio de Alimentos'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, M. Dias Branco Indústria e Comércio de Alimentos recorded free cash flow worth 79% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

M. Dias Branco Indústria e Comércio de Alimentos's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But we must concede we find its EBIT growth rate has the opposite effect. All these things considered, it appears that M. Dias Branco Indústria e Comércio de Alimentos can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of M. Dias Branco Indústria e Comércio de Alimentos's earnings per share history for free.

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.