These 4 Measures Indicate That Diagnósticos da América (BVMF:DASA3) Is Using Debt Extensively

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. As with many other companies Diagnósticos da América S.A. (BVMF:DASA3) makes use of debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Diagnósticos da América's Debt?

As you can see below, Diagnósticos da América had R$8.18b of debt at June 2025, down from R$11.4b a year prior. However, it also had R$1.35b in cash, and so its net debt is R$6.84b.

How Healthy Is Diagnósticos da América's Balance Sheet?

The latest balance sheet data shows that Diagnósticos da América had liabilities of R$3.99b due within a year, and liabilities of R$8.60b falling due after that. Offsetting these obligations, it had cash of R$1.35b as well as receivables valued at R$3.79b due within 12 months. So its liabilities total R$7.45b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the R$1.65b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Diagnósticos da América would likely require a major re-capitalisation if it had to pay its creditors today.

See our latest analysis for Diagnósticos da América

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.

While Diagnósticos da América's debt to EBITDA ratio (3.6) suggests that it uses some debt, its interest cover is very weak, at 0.94, suggesting high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. On a lighter note, we note that Diagnósticos da América grew its EBIT by 30% 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. 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 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, 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, Diagnósticos da América saw substantial negative free cash flow, in total. 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. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Diagnósticos da América you should be aware of, and 1 of them is a bit concerning.

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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