Does Hapvida Participações e Investimentos (BVMF:HAPV3) Have A Healthy Balance Sheet?

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. We note that Hapvida Participações e Investimentos S.A. (BVMF:HAPV3) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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. 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.

View our latest analysis for Hapvida Participações e Investimentos

How Much Debt Does Hapvida Participações e Investimentos Carry?

As you can see below, Hapvida Participações e Investimentos had R$2.08b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have R$2.48b in cash offsetting this, leading to net cash of R$400.1m.

A Look At Hapvida Participações e Investimentos' Liabilities

According to the last reported balance sheet, Hapvida Participações e Investimentos had liabilities of R$2.12b due within 12 months, and liabilities of R$3.57b due beyond 12 months. Offsetting this, it had R$2.48b in cash and R$617.5m in receivables that were due within 12 months. So it has liabilities totalling R$2.59b more than its cash and near-term receivables, combined.

Since publicly traded Hapvida Participações e Investimentos shares are worth a very impressive total of R$57.5b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Hapvida Participações e Investimentos boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Hapvida Participações e Investimentos grew its EBIT by 5.9% in the last year, making that debt load look even more manageable. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Hapvida Participações e Investimentos'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. Hapvida Participações e Investimentos may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Hapvida Participações e Investimentos's free cash flow amounted to 43% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

We could understand if investors are concerned about Hapvida Participações e Investimentos's liabilities, but we can be reassured by the fact it has has net cash of R$400.1m. And it also grew its EBIT by 5.9% over the last year. So we don't have any problem with Hapvida Participações e Investimentos's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Hapvida Participações e Investimentos that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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