These 4 Measures Indicate That Hapvida Participações e Investimentos (BVMF:HAPV3) Is Using Debt Reasonably Well

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 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.

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What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

What Is Hapvida Participações e Investimentos's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 Hapvida Participações e Investimentos had R$13.3b of debt, an increase on R$11.9b, over one year. However, it does have R$9.54b in cash offsetting this, leading to net debt of about R$3.74b.

How Healthy Is Hapvida Participações e Investimentos' Balance Sheet?

According to the last reported balance sheet, Hapvida Participações e Investimentos had liabilities of R$5.99b due within 12 months, and liabilities of R$19.8b due beyond 12 months. On the other hand, it had cash of R$9.54b and R$1.31b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$14.9b.

This is a mountain of leverage relative to its market capitalization of R$18.1b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

View our latest analysis for Hapvida Participações e Investimentos

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).

Hapvida Participações e Investimentos has a very low debt to EBITDA ratio of 1.3 so it is strange to see weak interest coverage, with last year's EBIT being only 1.1 times the interest expense. So while we're not necessarily alarmed we think that its debt is far from trivial. Also relevant is that Hapvida Participações e Investimentos has grown its EBIT by a very respectable 24% in the last year, thus enhancing its ability to pay down debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Hapvida Participações e Investimentos can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Over the last two years, Hapvida Participações e Investimentos actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Hapvida Participações e Investimentos's interest cover was a real negative on this analysis, although the other factors we considered were considerably better. 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. When we consider all the elements mentioned above, it seems to us that Hapvida Participações e Investimentos is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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.

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.