Natura &Co Holding (BVMF:NTCO3) Takes On Some Risk With Its Use Of Debt

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. Importantly, Natura &Co Holding S.A. (BVMF:NTCO3) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Natura &Co Holding

What Is Natura &Co Holding's Debt?

As you can see below, Natura &Co Holding had R$6.11b of debt at December 2023, down from R$13.6b a year prior. But on the other hand it also has R$7.74b in cash, leading to a R$1.63b net cash position.

A Look At Natura &Co Holding's Liabilities

According to the last reported balance sheet, Natura &Co Holding had liabilities of R$10.4b due within 12 months, and liabilities of R$9.21b due beyond 12 months. Offsetting this, it had R$7.74b in cash and R$4.33b in receivables that were due within 12 months. So it has liabilities totalling R$7.55b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Natura &Co Holding has a market capitalization of R$22.7b, 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. Despite its noteworthy liabilities, Natura &Co Holding boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Natura &Co Holding's EBIT launched higher than Elon Musk, gaining a whopping 1,467% on last year. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Natura &Co Holding 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Natura &Co Holding may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Natura &Co Holding saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Natura &Co Holding does have more liabilities than liquid assets, it also has net cash of R$1.63b. And we liked the look of last year's 1,467% year-on-year EBIT growth. So although we see some areas for improvement, we're not too worried about Natura &Co Holding's balance sheet. While Natura &Co Holding 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.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.