M. Dias Branco Indústria e Comércio de Alimentos (BVMF:MDIA3) Seems To Use Debt Quite 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 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 M. Dias Branco S.A. Indústria e Comércio de Alimentos (BVMF:MDIA3) does use debt in its business. But the more important question is: how much risk is that debt creating?

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What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

As you can see below, M. Dias Branco Indústria e Comércio de Alimentos had R$1.87b of debt at June 2025, down from R$2.56b a year prior. However, it does have R$2.15b in cash offsetting this, leading to net cash of R$282.9m.

How Strong Is M. Dias Branco Indústria e Comércio de Alimentos' Balance Sheet?

The latest balance sheet data shows that M. Dias Branco Indústria e Comércio de Alimentos had liabilities of R$2.54b due within a year, and liabilities of R$2.03b falling due after that. On the other hand, it had cash of R$2.15b and R$2.02b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$394.6m.

Of course, M. Dias Branco Indústria e Comércio de Alimentos has a market capitalization of R$9.29b, 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. 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!

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

The modesty of its debt load may become crucial for M. Dias Branco Indústria e Comércio de Alimentos if management cannot prevent a repeat of the 32% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, M. Dias Branco Indústria e Comércio de Alimentos actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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$282.9m in net cash. And it impressed us with free cash flow of R$611m, being 106% of its EBIT. So we don't have any problem with M. Dias Branco Indústria e Comércio de Alimentos's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for M. Dias Branco Indústria e Comércio de Alimentos 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.

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