Is Atom Empreendimentos e Participações (BVMF:ATOM3) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Atom Empreendimentos e Participações S.A. (BVMF:ATOM3) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Atom Empreendimentos e Participações

What Is Atom Empreendimentos e Participações's Debt?

As you can see below, Atom Empreendimentos e Participações had R$8.08m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has R$17.9m in cash to offset that, meaning it has R$9.81m net cash.

A Look At Atom Empreendimentos e Participações' Liabilities

The latest balance sheet data shows that Atom Empreendimentos e Participações had liabilities of R$2.34m due within a year, and liabilities of R$8.58m falling due after that. Offsetting these obligations, it had cash of R$17.9m as well as receivables valued at R$7.61m due within 12 months. So it actually has R$14.6m more liquid assets than total liabilities.

This surplus suggests that Atom Empreendimentos e 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 Atom Empreendimentos e Participações has more cash than debt is arguably a good indication that it can manage its debt safely.

The modesty of its debt load may become crucial for Atom Empreendimentos e Participações if management cannot prevent a repeat of the 44% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Atom Empreendimentos e Participações will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Atom Empreendimentos e 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 last three years, Atom Empreendimentos e Participações actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Atom Empreendimentos e Participações has net cash of R$9.81m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of R$9.4m, being 100% of its EBIT. So we don't think Atom Empreendimentos e Participações's use of debt is risky. 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. For instance, we've identified 3 warning signs for Atom Empreendimentos e Participações that you should be aware of.

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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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.