These 4 Measures Indicate That M. Dias Branco Indústria e Comércio de Alimentos (BVMF:MDIA3) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We can see that M. Dias Branco S.A. Indústria e Comércio de Alimentos (BVMF:MDIA3) does use debt in its business. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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, at the end of March 2025, M. Dias Branco Indústria e Comércio de Alimentos had R$2.31b of debt, up from R$2.14b a year ago. Click the image for more detail. However, it does have R$2.29b in cash offsetting this, leading to net debt of about R$20.5m.

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

According to the last reported balance sheet, M. Dias Branco Indústria e Comércio de Alimentos had liabilities of R$2.75b due within 12 months, and liabilities of R$2.10b due beyond 12 months. On the other hand, it had cash of R$2.29b and R$1.71b worth of receivables due within a year. So its liabilities total R$857.4m more than the combination of its cash and short-term receivables.

Of course, M. Dias Branco Indústria e Comércio de Alimentos has a market capitalization of R$7.87b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, M. Dias Branco Indústria e Comércio de Alimentos has virtually no net debt, 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

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

M. Dias Branco Indústria e Comércio de Alimentos has very modest net debt levels, with net debt at just 0.02 times EBITDA. Humorously, it actually received more in interest over the last twelve months than it had to pay. So there's no doubt this company can take on debt as easily as enthusiastic spray-tanners take on an orange hue. 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 35% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, M. Dias Branco Indústria e Comércio de Alimentos generated free cash flow amounting to a very robust 86% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

Happily, M. Dias Branco Indústria e Comércio de Alimentos's impressive interest cover implies it has the upper hand on its debt. 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. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for M. Dias Branco Indústria e Comércio de Alimentos you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.