M. Dias Branco Indústria e Comércio de Alimentos (BVMF:MDIA3) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, M. Dias Branco S.A. Indústria e Comércio de Alimentos (BVMF:MDIA3) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

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

What Is M. Dias Branco Indústria e Comércio de Alimentos's 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$2.14b of debt in March 2024, down from R$2.48b, one year before. But it also has R$2.19b in cash to offset that, meaning it has R$50.7m net cash.

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

According to the last reported balance sheet, M. Dias Branco Indústria e Comércio de Alimentos had liabilities of R$2.28b due within 12 months, and liabilities of R$2.38b due beyond 12 months. Offsetting this, it had R$2.19b in cash and R$1.84b in receivables that were due within 12 months. So it has liabilities totalling R$625.2m 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$9.86b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, M. Dias Branco Indústria e Comércio de Alimentos boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that M. Dias Branco Indústria e Comércio de Alimentos has boosted its EBIT by 80%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if M. Dias Branco Indústria e Comércio de Alimentos 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While M. Dias Branco Indústria e Comércio de Alimentos has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, M. Dias Branco Indústria e Comércio de Alimentos actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that M. Dias Branco Indústria e Comércio de Alimentos has R$50.7m in net cash. The cherry on top was that in converted 112% of that EBIT to free cash flow, bringing in R$1.9b. So we don't think M. Dias Branco Indústria e Comércio de Alimentos's use of debt is risky. 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.

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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.

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