Hapvida Participações e Investimentos (BVMF:HAPV3) Has A Pretty 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 real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Debt?

As you can see below, Hapvida Participações e Investimentos had R$2.06b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have R$2.57b in cash offsetting this, leading to net cash of R$506.4m.

A Look At Hapvida Participações e Investimentos' Liabilities

According to the last reported balance sheet, Hapvida Participações e Investimentos had liabilities of R$1.89b due within 12 months, and liabilities of R$3.42b due beyond 12 months. Offsetting these obligations, it had cash of R$2.57b as well as receivables valued at R$498.0m due within 12 months. So its liabilities total R$2.24b more than the combination of its cash and short-term receivables.

Of course, Hapvida Participações e Investimentos has a titanic market capitalization of R$65.8b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

And we also note warmly that Hapvida Participações e Investimentos grew its EBIT by 20% last year, making its debt load easier to handle. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 42% of its EBIT, which is weaker 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$506.4m. And we liked the look of last year's 20% year-on-year EBIT growth. So we don't think Hapvida Participações e Investimentos's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Hapvida Participações e Investimentos has 1 warning sign we think you should be aware of.

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. 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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