Nutriplant Indústria e Comércio S/A (BVMF:NUTR3) Has A Pretty Healthy Balance Sheet

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.' 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 can see that Nutriplant Indústria e Comércio S/A (BVMF:NUTR3) does use debt in its business. But is this debt a concern to shareholders?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Nutriplant Indústria e Comércio S/A

How Much Debt Does Nutriplant Indústria e Comércio S/A Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Nutriplant Indústria e Comércio S/A had R$10.1m of debt, an increase on R$9.55m, over one year. But it also has R$14.3m in cash to offset that, meaning it has R$4.19m net cash.

How Healthy Is Nutriplant Indústria e Comércio S/A's Balance Sheet?

The latest balance sheet data shows that Nutriplant Indústria e Comércio S/A had liabilities of R$46.7m due within a year, and liabilities of R$30.1m falling due after that. Offsetting these obligations, it had cash of R$14.3m as well as receivables valued at R$28.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$33.7m.

This deficit is considerable relative to its market capitalization of R$52.5m, so it does suggest shareholders should keep an eye on Nutriplant Indústria e Comércio S/A's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Nutriplant Indústria e Comércio S/A also has more cash than debt, so we're pretty confident it can manage its debt safely.

We note that Nutriplant Indústria e Comércio S/A grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Nutriplant Indústria e Comércio S/A will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Nutriplant Indústria e Comércio S/A 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, Nutriplant Indústria e Comércio S/A's free cash flow amounted to 47% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Nutriplant Indústria e Comércio S/A does have more liabilities than liquid assets, it also has net cash of R$4.19m. And it impressed us with its EBIT growth of 24% over the last year. So we don't have any problem with Nutriplant Indústria e Comércio S/A's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Nutriplant Indústria e Comércio S/A has 1 warning sign we think you should be aware of.

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.