Does T4F Entretenimento (BVMF:SHOW3) Have A 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies T4F Entretenimento S.A. (BVMF:SHOW3) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, 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 T4F Entretenimento

What Is T4F Entretenimento's Debt?

As you can see below, T4F Entretenimento had R$102.4m of debt at June 2022, down from R$121.7m a year prior. But it also has R$204.9m in cash to offset that, meaning it has R$102.5m net cash.

A Look At T4F Entretenimento's Liabilities

According to the last reported balance sheet, T4F Entretenimento had liabilities of R$291.7m due within 12 months, and liabilities of R$120.4m due beyond 12 months. On the other hand, it had cash of R$204.9m and R$105.6m worth of receivables due within a year. So its liabilities total R$101.6m more than the combination of its cash and short-term receivables.

T4F Entretenimento has a market capitalization of R$246.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, T4F Entretenimento also has more cash than debt, so we're pretty confident it can manage its debt safely.

Notably, T4F Entretenimento made a loss at the EBIT level, last year, but improved that to positive EBIT of R$929k in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is T4F Entretenimento's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. T4F Entretenimento 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 year, T4F Entretenimento 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 T4F Entretenimento does have more liabilities than liquid assets, it also has net cash of R$102.5m. The cherry on top was that in converted 3,339% of that EBIT to free cash flow, bringing in R$31m. So we are not troubled with T4F Entretenimento's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for T4F Entretenimento you should be aware of, and 1 of them is a bit unpleasant.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.