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

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?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

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?

As you can see below, M. Dias Branco Indústria e Comércio de Alimentos had R$2.56b of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have R$2.53b in cash offsetting this, leading to net debt of about R$38.0m.

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$2.75b due within a year, and liabilities of R$2.45b falling due after that. Offsetting these obligations, it had cash of R$2.53b as well as receivables valued at R$1.99b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$686.6m.

Of course, M. Dias Branco Indústria e Comércio de Alimentos has a market capitalization of R$8.37b, 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. 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!

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 barely any net debt, as demonstrated by its net debt to EBITDA ratio of only 0.027. Humorously, 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 an Olympic ice-skater handles a pirouette. In addition to that, we're happy to report that M. Dias Branco Indústria e Comércio de Alimentos has boosted its EBIT by 72%, thus reducing the spectre of future debt repayments. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

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 conversion of EBIT to free cash flow is also very heartening. We think M. Dias Branco Indústria e Comércio de Alimentos is no more beholden to its lenders, than the birds are to birdwatchers. To our minds it has a healthy happy balance sheet. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of M. Dias Branco Indústria e Comércio de Alimentos's earnings per share history for free.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.