Here's Why Hapvida Participações e Investimentos (BVMF:HAPV3) Can Afford Some Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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.

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Hapvida Participações e Investimentos

What Is Hapvida Participações e Investimentos's Net Debt?

As you can see below, at the end of September 2022, Hapvida Participações e Investimentos had R$10.9b of debt, up from R$2.06b a year ago. Click the image for more detail. However, it does have R$3.84b in cash offsetting this, leading to net debt of about R$7.03b.

How Strong Is Hapvida Participações e Investimentos' Balance Sheet?

The latest balance sheet data shows that Hapvida Participações e Investimentos had liabilities of R$6.68b due within a year, and liabilities of R$15.4b falling due after that. Offsetting these obligations, it had cash of R$3.84b as well as receivables valued at R$1.64b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$16.6b.

While this might seem like a lot, it is not so bad since Hapvida Participações e Investimentos has a market capitalization of R$33.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 108%, to R$20b. So there's no doubt that shareholders are cheering for growth

Caveat Emptor

While we can certainly appreciate Hapvida Participações e Investimentos's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at R$230m. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of R$261m into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Hapvida Participações e Investimentos .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.