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

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 Hapvida Participações e Investimentos S.A. (BVMF:HAPV3) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Hapvida Participações e Investimentos

What Is Hapvida Participações e Investimentos's Net Debt?

The chart below, which you can click on for greater detail, shows that Hapvida Participações e Investimentos had R$2.09b in debt in June 2021; about the same as the year before. However, it does have R$2.50b in cash offsetting this, leading to net cash of R$402.9m.

How Strong Is Hapvida Participações e Investimentos' Balance Sheet?

We can see from the most recent balance sheet that Hapvida Participações e Investimentos had liabilities of R$2.65b falling due within a year, and liabilities of R$3.99b due beyond that. Offsetting these obligations, it had cash of R$2.50b as well as receivables valued at R$704.7m due within 12 months. So its liabilities total R$3.44b more than the combination of its cash and short-term receivables.

Since publicly traded Hapvida Participações e Investimentos shares are worth a very impressive total of R$58.3b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Hapvida Participações e Investimentos also has more cash than debt, so we're pretty confident it can manage its debt safely.

The modesty of its debt load may become crucial for Hapvida Participações e Investimentos if management cannot prevent a repeat of the 37% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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'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. While Hapvida Participações e Investimentos has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Hapvida Participações e Investimentos recorded free cash flow of 31% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

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$402.9m. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Hapvida Participações e Investimentos , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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