Diagnósticos da América (BVMF:DASA3) Seems To Be Using A Lot Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Diagnósticos da América S.A. (BVMF:DASA3) makes use of debt. But is this debt a concern to shareholders?

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When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Diagnósticos da América Carry?

As you can see below, at the end of March 2025, Diagnósticos da América had R$12.9b of debt, up from R$11.8b a year ago. Click the image for more detail. However, it also had R$3.44b in cash, and so its net debt is R$9.47b.

How Healthy Is Diagnósticos da América's Balance Sheet?

According to the last reported balance sheet, Diagnósticos da América had liabilities of R$5.42b due within 12 months, and liabilities of R$15.0b due beyond 12 months. Offsetting this, it had R$3.44b in cash and R$6.33b in receivables that were due within 12 months. So its liabilities total R$10.7b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the R$1.66b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Diagnósticos da América would probably need a major re-capitalization if its creditors were to demand repayment.

Check out our latest analysis for Diagnósticos da América

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.

Weak interest cover of 0.79 times and a disturbingly high net debt to EBITDA ratio of 5.2 hit our confidence in Diagnósticos da América like a one-two punch to the gut. The debt burden here is substantial. On the other hand, Diagnósticos da América grew its EBIT by 26% in the last year. If it can maintain that kind of improvement, its debt load will begin to melt away like glaciers in a warming world. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Diagnósticos da América 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 the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Diagnósticos da América burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both Diagnósticos da América's conversion of EBIT to free cash flow and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at growing its EBIT; that's encouraging. It's also worth noting that Diagnósticos da América is in the Healthcare industry, which is often considered to be quite defensive. Overall, it seems to us that Diagnósticos da América's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Diagnósticos da América that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.