These 4 Measures Indicate That Dexxos Participações (BVMF:DEXP3) 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.' 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. We note that Dexxos Participações S.A. (BVMF:DEXP3) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Dexxos Participações

How Much Debt Does Dexxos Participações Carry?

As you can see below, Dexxos Participações had R$261.4m of debt at September 2024, down from R$285.1m a year prior. However, its balance sheet shows it holds R$391.8m in cash, so it actually has R$130.4m net cash.

How Healthy Is Dexxos Participações' Balance Sheet?

According to the last reported balance sheet, Dexxos Participações had liabilities of R$269.1m due within 12 months, and liabilities of R$293.3m due beyond 12 months. Offsetting these obligations, it had cash of R$391.8m as well as receivables valued at R$390.2m due within 12 months. So it can boast R$219.5m more liquid assets than total liabilities.

This surplus suggests that Dexxos Participações is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Dexxos Participações has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Dexxos Participações's EBIT dived 17%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Dexxos Participações'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Dexxos Participações 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 most recent three years, Dexxos Participações recorded free cash flow worth 60% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Dexxos Participações has net cash of R$130.4m, as well as more liquid assets than liabilities. So we are not troubled with Dexxos Participações's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Dexxos Participações you should know about.

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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