Is Grupo Casas Bahia (BVMF:BHIA3) Using Debt In A Risky Way?

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. As with many other companies Grupo Casas Bahia S.A. (BVMF:BHIA3) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Grupo Casas Bahia

What Is Grupo Casas Bahia's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Grupo Casas Bahia had R$11.6b of debt, an increase on R$10.1b, over one year. However, because it has a cash reserve of R$2.12b, its net debt is less, at about R$9.44b.

How Strong Is Grupo Casas Bahia's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Grupo Casas Bahia had liabilities of R$17.8b due within 12 months and liabilities of R$11.3b due beyond that. On the other hand, it had cash of R$2.12b and R$5.65b worth of receivables due within a year. So it has liabilities totalling R$21.4b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the R$349.9m 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 definitely think shareholders need to watch this one closely. At the end of the day, Grupo Casas Bahia would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Grupo Casas Bahia's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Grupo Casas Bahia made a loss at the EBIT level, and saw its revenue drop to R$27b, which is a fall of 12%. We would much prefer see growth.

Caveat Emptor

Not only did Grupo Casas Bahia's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost R$2.0m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost R$1.6b in the last year. So we're not very excited about owning this stock. Its too risky for us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Grupo Casas Bahia is showing 4 warning signs in our investment analysis , and 2 of those don't sit too well with us...

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.