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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Hapvida Participações e Investimentos S.A. (BVMF:HAPV3) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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.

View our latest analysis for Hapvida Participações e Investimentos

What Is Hapvida Participações e Investimentos's Net Debt?

As you can see below, Hapvida Participações e Investimentos had R$11.2b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had R$7.40b in cash, and so its net debt is R$3.80b.

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$6.98b falling due within a year, and liabilities of R$18.2b due beyond that. Offsetting these obligations, it had cash of R$7.40b as well as receivables valued at R$1.02b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$16.7b.

This is a mountain of leverage relative to its market capitalization of R$19.6b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Given net debt is only 1.3 times EBITDA, it is initially surprising to see that Hapvida Participações e Investimentos's EBIT has low interest coverage of 1.2 times. So while we're not necessarily alarmed we think that its debt is far from trivial. We also note that Hapvida Participações e Investimentos improved its EBIT from a last year's loss to a positive R$1.7b. When analysing debt levels, the balance sheet is the obvious place to start. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, Hapvida Participações e Investimentos actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Based on what we've seen Hapvida Participações e Investimentos is not finding it easy, given its interest cover, but the other factors we considered give us cause to be optimistic. In particular, we are dazzled with its conversion of EBIT to free cash flow. We would also note that Healthcare industry companies like Hapvida Participações e Investimentos commonly do use debt without problems. Looking at all this data makes us feel a little cautious about Hapvida Participações e Investimentos's debt levels. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more risky. While Hapvida Participações e Investimentos didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

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.