Rede D'Or São Luiz (BVMF:RDOR3) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Rede D'Or São Luiz S.A. (BVMF:RDOR3) does carry debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Rede D'Or São Luiz's Debt?

As you can see below, at the end of March 2025, Rede D'Or São Luiz had R$39.9b of debt, up from R$35.0b a year ago. Click the image for more detail. But on the other hand it also has R$40.0b in cash, leading to a R$54.1m net cash position.

How Healthy Is Rede D'Or São Luiz's Balance Sheet?

According to the last reported balance sheet, Rede D'Or São Luiz had liabilities of R$18.4b due within 12 months, and liabilities of R$58.3b due beyond 12 months. On the other hand, it had cash of R$40.0b and R$10.9b worth of receivables due within a year. So its liabilities total R$25.9b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Rede D'Or São Luiz has a huge market capitalization of R$72.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Rede D'Or São Luiz also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Rede D'Or São Luiz

In addition to that, we're happy to report that Rede D'Or São Luiz has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Rede D'Or São Luiz can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Rede D'Or São Luiz 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. In the last three years, Rede D'Or São Luiz created free cash flow amounting to 12% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While Rede D'Or São Luiz does have more liabilities than liquid assets, it also has net cash of R$54.1m. And it impressed us with its EBIT growth of 31% over the last year. So we are not troubled with Rede D'Or São Luiz's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Rede D'Or São Luiz's earnings per share history for free.

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.