We Think M. Dias Branco Indústria e Comércio de Alimentos (BVMF:MDIA3) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. 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?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at 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 Debt?

The chart below, which you can click on for greater detail, shows that M. Dias Branco Indústria e Comércio de Alimentos had R$2.26b in debt in September 2023; about the same as the year before. However, it does have R$1.85b in cash offsetting this, leading to net debt of about R$417.9m.

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

Zooming in on the latest balance sheet data, we can see that M. Dias Branco Indústria e Comércio de Alimentos had liabilities of R$2.45b due within 12 months and liabilities of R$2.18b due beyond that. Offsetting these obligations, it had cash of R$1.85b as well as receivables valued at R$1.80b due within 12 months. So it has liabilities totalling R$981.8m 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$13.1b, 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.

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). 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 has a low debt to EBITDA ratio of only 0.41. And remarkably, despite having net debt, it actually received more in interest over the last twelve months than it had to pay. So it's fair to say it can handle debt like a hotshot teppanyaki chef handles cooking. Also good is that M. Dias Branco Indústria e Comércio de Alimentos grew its EBIT at 12% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. 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.

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. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Overall, we don't think M. Dias Branco Indústria e Comércio de Alimentos is taking any bad risks, as its debt load seems modest. So the balance sheet looks pretty healthy, to us. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.