Health Check: How Prudently Does C&A Modas (BVMF:CEAB3) Use Debt?

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.' 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. Importantly, C&A Modas S.A. (BVMF:CEAB3) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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, 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.

See our latest analysis for C&A Modas

How Much Debt Does C&A Modas Carry?

The image below, which you can click on for greater detail, shows that at December 2020 C&A Modas had debt of R$1.21b, up from none in one year. But on the other hand it also has R$1.51b in cash, leading to a R$297.9m net cash position.

How Strong Is C&A Modas' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that C&A Modas had liabilities of R$2.25b due within 12 months and liabilities of R$2.40b due beyond that. On the other hand, it had cash of R$1.51b and R$1.35b worth of receivables due within a year. So it has liabilities totalling R$1.80b more than its cash and near-term receivables, combined.

This deficit isn't so bad because C&A Modas is worth R$3.84b, and thus could probably raise enough capital to shore up 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. While it does have liabilities worth noting, C&A Modas also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if C&A Modas 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 C&A Modas had a loss before interest and tax, and actually shrunk its revenue by 23%, to R$4.1b. To be frank that doesn't bode well.

So How Risky Is C&A Modas?

Although C&A Modas had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of R$345m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Be aware that C&A Modas is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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