Hapvida Participações e Investimentos (BVMF:HAPV3) Is Making Moderate Use Of Debt

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.' 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. As with many other companies Hapvida Participações e Investimentos S.A. (BVMF:HAPV3) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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

How Much Debt Does Hapvida Participações e Investimentos Carry?

The chart below, which you can click on for greater detail, shows that Hapvida Participações e Investimentos had R$11.0b in debt in September 2023; about the same as the year before. However, it does have R$5.43b in cash offsetting this, leading to net debt of about R$5.53b.

How Strong Is Hapvida Participações e Investimentos' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hapvida Participações e Investimentos had liabilities of R$8.49b due within 12 months and liabilities of R$17.2b due beyond that. On the other hand, it had cash of R$5.43b and R$2.33b worth of receivables due within a year. So its liabilities total R$17.9b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Hapvida Participações e Investimentos is worth R$32.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

Over 12 months, Hapvida Participações e Investimentos reported revenue of R$27b, which is a gain of 36%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

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$164m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$1.0b. So to be blunt we do think it is 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 - Hapvida Participações e Investimentos has 2 warning signs we think you should be aware of.

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.