Does T4F Entretenimento (BVMF:SHOW3) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies T4F Entretenimento S.A. (BVMF:SHOW3) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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.

View our latest analysis for T4F Entretenimento

How Much Debt Does T4F Entretenimento Carry?

The image below, which you can click on for greater detail, shows that T4F Entretenimento had debt of R$85.3m at the end of March 2023, a reduction from R$126.1m over a year. But it also has R$175.7m in cash to offset that, meaning it has R$90.4m net cash.

How Strong Is T4F Entretenimento's Balance Sheet?

According to the last reported balance sheet, T4F Entretenimento had liabilities of R$386.2m due within 12 months, and liabilities of R$117.5m due beyond 12 months. Offsetting this, it had R$175.7m in cash and R$244.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$83.9m.

T4F Entretenimento has a market capitalization of R$195.5m, 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.

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$53m. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since T4F Entretenimento 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While T4F Entretenimento 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. During the last year, T4F Entretenimento produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

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$90.4m. So we don't have any problem with T4F Entretenimento's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with T4F Entretenimento (including 2 which are a bit unpleasant) .

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.