Here's Why Marisa Lojas (BVMF:AMAR3) Can Afford Some Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Marisa Lojas S.A. (BVMF:AMAR3) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Marisa Lojas

How Much Debt Does Marisa Lojas Carry?

The image below, which you can click on for greater detail, shows that Marisa Lojas had debt of R$783.2m at the end of September 2020, a reduction from R$984.5m over a year. On the flip side, it has R$320.5m in cash leading to net debt of about R$462.7m.

A Look At Marisa Lojas' Liabilities

We can see from the most recent balance sheet that Marisa Lojas had liabilities of R$1.14b falling due within a year, and liabilities of R$841.4m due beyond that. On the other hand, it had cash of R$320.5m and R$819.4m worth of receivables due within a year. So its liabilities total R$843.6m more than the combination of its cash and short-term receivables.

Marisa Lojas has a market capitalization of R$1.45b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Marisa Lojas can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Marisa Lojas made a loss at the EBIT level, and saw its revenue drop to R$2.3b, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

Not only did Marisa Lojas's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable R$227m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of R$371m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Marisa Lojas you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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