Nutriplant Indústria e Comércio S/A (BVMF:NUTR3) Has A Somewhat Strained Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Nutriplant Indústria e Comércio S/A (BVMF:NUTR3) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

What Is Nutriplant Indústria e Comércio S/A's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Nutriplant Indústria e Comércio S/A had R$8.99m of debt in March 2024, down from R$12.4m, one year before. However, it also had R$855.0k in cash, and so its net debt is R$8.13m.

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

According to the last reported balance sheet, Nutriplant Indústria e Comércio S/A had liabilities of R$44.7m due within 12 months, and liabilities of R$31.1m due beyond 12 months. On the other hand, it had cash of R$855.0k and R$38.2m worth of receivables due within a year. So it has liabilities totalling R$36.8m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Nutriplant Indústria e Comércio S/A has a market capitalization of R$68.4m, 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.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). 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).

Given net debt is only 0.63 times EBITDA, it is initially surprising to see that Nutriplant Indústria e Comércio S/A's EBIT has low interest coverage of 2.3 times. So one way or the other, it's clear the debt levels are not trivial. Unfortunately, Nutriplant Indústria e Comércio S/A's EBIT flopped 20% over the last four quarters. If earnings continue to decline at that rate then handling the debt will be more difficult than taking three children under 5 to a fancy pants restaurant. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Nutriplant Indústria e Comércio S/A's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Nutriplant Indústria e Comércio S/A created free cash flow amounting to 18% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Our View

We'd go so far as to say Nutriplant Indústria e Comércio S/A's EBIT growth rate was disappointing. But at least it's pretty decent at managing its debt, based on its EBITDA,; that's encouraging. Looking at the bigger picture, it seems clear to us that Nutriplant Indústria e Comércio S/A's use of debt is creating risks for the company. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 3 warning signs we've spotted with Nutriplant Indústria e Comércio S/A .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.