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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Grupo Casas Bahia S.A. (BVMF:BHIA3) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Grupo Casas Bahia

What Is Grupo Casas Bahia's Net Debt?

As you can see below, at the end of September 2024, Grupo Casas Bahia had R$11.6b of debt, up from R$10.1b a year ago. Click the image for more detail. However, it does have R$2.12b in cash offsetting this, leading to net debt of about R$9.44b.

How Strong Is Grupo Casas Bahia's Balance Sheet?

We can see from the most recent balance sheet that Grupo Casas Bahia had liabilities of R$17.8b falling due within a year, and liabilities of R$11.3b due beyond that. Offsetting these obligations, it had cash of R$2.12b as well as receivables valued at R$5.65b due within 12 months. So its liabilities total R$21.4b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the R$494.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Grupo Casas Bahia would likely require a major re-capitalisation if it had to pay its creditors today. 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 Grupo Casas Bahia 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.

In the last year Grupo Casas Bahia had a loss before interest and tax, and actually shrunk its revenue by 12%, to R$27b. That's not what we would hope to see.

Caveat Emptor

While Grupo Casas Bahia's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. 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. 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$1.6b in the last year. So we think buying this stock is risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Grupo Casas Bahia (including 1 which makes us a bit uncomfortable) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.