Is Marisa Lojas (BVMF:AMAR3) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Marisa Lojas S.A. (BVMF:AMAR3) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Marisa Lojas

What Is Marisa Lojas's Debt?

The image below, which you can click on for greater detail, shows that Marisa Lojas had debt of R$780.8m at the end of June 2023, a reduction from R$930.2m over a year. However, it also had R$369.4m in cash, and so its net debt is R$411.5m.

A Look At Marisa Lojas' Liabilities

Zooming in on the latest balance sheet data, we can see that Marisa Lojas had liabilities of R$1.21b due within 12 months and liabilities of R$1.15b due beyond that. On the other hand, it had cash of R$369.4m and R$648.2m worth of receivables due within a year. So it has liabilities totalling R$1.35b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the R$183.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Marisa Lojas would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Marisa Lojas 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.

In the last year Marisa Lojas had a loss before interest and tax, and actually shrunk its revenue by 9.6%, to R$2.5b. We would much prefer see growth.

Caveat Emptor

Importantly, Marisa Lojas had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable R$195m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost R$478m in the last year. So we think buying this stock is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Marisa Lojas (of which 2 don't sit too well with us!) you should know about.

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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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.