Does Embpar Participacoes (BVMF:EPAR3) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Embpar Participacoes S.A. (BVMF:EPAR3) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 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 Embpar Participacoes

What Is Embpar Participacoes's Net Debt?

The image below, which you can click on for greater detail, shows that Embpar Participacoes had debt of R$34.1m at the end of June 2023, a reduction from R$58.2m over a year. But on the other hand it also has R$36.3m in cash, leading to a R$2.25m net cash position.

How Healthy Is Embpar Participacoes' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Embpar Participacoes had liabilities of R$79.5m due within 12 months and liabilities of R$33.6m due beyond that. On the other hand, it had cash of R$36.3m and R$90.5m worth of receivables due within a year. So it actually has R$13.6m more liquid assets than total liabilities.

This short term liquidity is a sign that Embpar Participacoes could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Embpar Participacoes has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Embpar Participacoes has been able to increase its EBIT by 26% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Embpar Participacoes will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Embpar Participacoes has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Considering the last three years, Embpar Participacoes actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Embpar Participacoes has net cash of R$2.25m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 26% over the last year. So we don't have any problem with Embpar Participacoes's use of debt. 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. Case in point: We've spotted 4 warning signs for Embpar Participacoes you should be aware of, and 1 of them shouldn't be ignored.

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.