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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Hapvida Participações e Investimentos S.A. (BVMF:HAPV3) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

View our latest analysis for Hapvida Participações e Investimentos

What Is Hapvida Participações e Investimentos's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Hapvida Participações e Investimentos had R$11.9b of debt, an increase on R$10.8b, over one year. However, because it has a cash reserve of R$4.41b, its net debt is less, at about R$7.49b.

How Healthy 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$8.15b falling due within a year, and liabilities of R$16.8b due beyond that. On the other hand, it had cash of R$4.41b and R$2.12b worth of receivables due within a year. So its liabilities total R$18.4b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of R$30.1b, so it does suggest shareholders should keep an eye on Hapvida Participações e Investimentos' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Hapvida Participações e Investimentos wasn't profitable at an EBIT level, but managed to grow its revenue by 107%, to R$26b. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

Even though Hapvida Participações e Investimentos managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost R$429m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of R$938m. So we do think this stock is quite risky. 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. For example, we've discovered 1 warning sign for Hapvida Participações e Investimentos that you should be aware of before investing here.

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.