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.' 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. We can see that M. Dias Branco S.A. Indústria e Comércio de Alimentos (BVMF:MDIA3) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

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

How Much Debt Does M. Dias Branco Indústria e Comércio de Alimentos Carry?

The image below, which you can click on for greater detail, shows that at March 2023 M. Dias Branco Indústria e Comércio de Alimentos had debt of R$2.48b, up from R$1.94b in one year. On the flip side, it has R$790.8m in cash leading to net debt of about R$1.69b.

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$2.26b falling due within a year, and liabilities of R$2.16b due beyond that. Offsetting this, it had R$790.8m in cash and R$1.77b in receivables that were due within 12 months. So it has liabilities totalling R$1.85b more than its cash and near-term receivables, combined.

Since publicly traded M. Dias Branco Indústria e Comércio de Alimentos shares are worth a total of R$14.0b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

M. Dias Branco Indústria e Comércio de Alimentos's net debt to EBITDA ratio of about 1.8 suggests only moderate use of debt. And its commanding EBIT of 687 times its interest expense, implies the debt load is as light as a peacock feather. It is well worth noting that M. Dias Branco Indústria e Comércio de Alimentos's EBIT shot up like bamboo after rain, gaining 40% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. 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 company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, M. Dias Branco Indústria e Comércio de Alimentos recorded free cash flow worth 66% 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

The good news is that M. Dias Branco Indústria e Comércio de Alimentos's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And that's just the beginning of the good news since its EBIT growth rate is also very heartening. Zooming out, M. Dias Branco Indústria e Comércio de Alimentos seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. Over time, share prices tend to follow earnings per share, so if you're interested in M. Dias Branco Indústria e Comércio de Alimentos, you may well want to click here to check an interactive graph of its earnings per share history.

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.