Is T4F Entretenimento (BVMF:SHOW3) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that T4F Entretenimento S.A. (BVMF:SHOW3) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for T4F Entretenimento

How Much Debt Does T4F Entretenimento Carry?

As you can see below, T4F Entretenimento had R$123.8m of debt, at September 2021, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds R$200.7m in cash, so it actually has R$76.9m net cash.

How Healthy Is T4F Entretenimento's Balance Sheet?

According to the last reported balance sheet, T4F Entretenimento had liabilities of R$205.8m due within 12 months, and liabilities of R$137.7m due beyond 12 months. Offsetting these obligations, it had cash of R$200.7m as well as receivables valued at R$59.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$83.0m.

T4F Entretenimento has a market capitalization of R$178.6m, 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. 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.

Over 12 months, T4F Entretenimento made a loss at the EBIT level, and saw its revenue drop to R$12m, which is a fall of 90%. That makes us nervous, to say the least.

So How Risky Is T4F Entretenimento?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that T4F Entretenimento had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through R$33m of cash and made a loss of R$101m. But the saving grace is the R$76.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 4 warning signs for T4F Entretenimento (1 is potentially serious) 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.