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.' 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. As with many other companies T4F Entretenimento S.A. (BVMF:SHOW3) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for T4F Entretenimento

How Much Debt Does T4F Entretenimento Carry?

You can click the graphic below for the historical numbers, but it shows that T4F Entretenimento had R$106.7m of debt in September 2022, down from R$123.8m, one year before. But on the other hand it also has R$225.6m in cash, leading to a R$118.9m net cash position.

A Look At T4F Entretenimento's Liabilities

Zooming in on the latest balance sheet data, we can see that T4F Entretenimento had liabilities of R$328.7m due within 12 months and liabilities of R$134.3m due beyond that. Offsetting these obligations, it had cash of R$225.6m as well as receivables valued at R$137.5m due within 12 months. So it has liabilities totalling R$99.9m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of R$151.7m. 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, T4F Entretenimento also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, T4F Entretenimento turned things around in the last 12 months, delivering and EBIT of R$31m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since T4F Entretenimento 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, a company can only pay off debt with cold hard cash, not accounting profits. 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. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although T4F Entretenimento's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of R$118.9m. The cherry on top was that in converted 191% of that EBIT to free cash flow, bringing in R$59m. So we don't have any problem with T4F Entretenimento's use of debt. 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 concerning.

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.