Is T4F Entretenimento (BVMF:SHOW3) Using Too Much Debt?

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.' 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 should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for T4F Entretenimento

How Much Debt Does T4F Entretenimento Carry?

The chart below, which you can click on for greater detail, shows that T4F Entretenimento had R$121.0m in debt in December 2020; about the same as the year before. However, it does have R$201.9m in cash offsetting this, leading to net cash of R$80.9m.

A Look At T4F Entretenimento's Liabilities

According to the last reported balance sheet, T4F Entretenimento had liabilities of R$182.8m due within 12 months, and liabilities of R$156.5m due beyond 12 months. Offsetting this, it had R$201.9m in cash and R$38.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$99.2m.

T4F Entretenimento has a market capitalization of R$267.6m, 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. 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.

Over 12 months, T4F Entretenimento made a loss at the EBIT level, and saw its revenue drop to R$40m, which is a fall of 90%. That makes us nervous, to say the least.

So How Risky Is T4F Entretenimento?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year T4F Entretenimento had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of R$32m and booked a R$109m accounting loss. But the saving grace is the R$80.9m 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. 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. For example T4F Entretenimento has 2 warning signs (and 1 which is significant) we think you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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