Is T4F Entretenimento (BVMF:SHOW3) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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

What Is T4F Entretenimento's Debt?

As you can see below, T4F Entretenimento had R$41.3m of debt at March 2024, down from R$85.3m a year prior. However, it does have R$95.4m in cash offsetting this, leading to net cash of R$54.0m.

How Strong Is T4F Entretenimento's Balance Sheet?

We can see from the most recent balance sheet that T4F Entretenimento had liabilities of R$174.0m falling due within a year, and liabilities of R$75.5m due beyond that. Offsetting these obligations, it had cash of R$95.4m as well as receivables valued at R$87.0m due within 12 months. So it has liabilities totalling R$67.1m more than its cash and near-term receivables, combined.

T4F Entretenimento has a market capitalization of R$133.5m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Another good sign is that T4F Entretenimento has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. 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. Over the last two years, T4F Entretenimento reported free cash flow worth 6.2% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

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$54.0m. And it impressed us with its EBIT growth of 26% over the last year. So we are not troubled with T4F Entretenimento's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for T4F Entretenimento (of which 2 make us uncomfortable!) you should know about.

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.