Is Três Tentos Agroindustrial S/A (BVMF:TTEN3) A Risky Investment?

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.' 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, Três Tentos Agroindustrial S/A (BVMF:TTEN3) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Três Tentos Agroindustrial S/A

What Is Três Tentos Agroindustrial S/A's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Três Tentos Agroindustrial S/A had R$1.26b of debt, an increase on R$1.15b, over one year. However, it does have R$1.15b in cash offsetting this, leading to net debt of about R$116.3m.

How Healthy Is Três Tentos Agroindustrial S/A's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Três Tentos Agroindustrial S/A had liabilities of R$2.80b due within 12 months and liabilities of R$649.1m due beyond that. Offsetting this, it had R$1.15b in cash and R$827.7m in receivables that were due within 12 months. So its liabilities total R$1.47b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Três Tentos Agroindustrial S/A has a market capitalization of R$5.45b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Três Tentos Agroindustrial S/A has a low net debt to EBITDA ratio of only 0.19. And its EBIT covers its interest expense a whopping 17.6 times over. So we're pretty relaxed about its super-conservative use of debt. On top of that, Três Tentos Agroindustrial S/A grew its EBIT by 47% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Três Tentos Agroindustrial S/A's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Três Tentos Agroindustrial S/A saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Happily, Três Tentos Agroindustrial S/A's impressive interest cover implies it has the upper hand on its debt. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. All these things considered, it appears that Três Tentos Agroindustrial S/A can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Três Tentos Agroindustrial S/A is showing 1 warning sign in our investment analysis , you should know about...

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.