Does Grupo SBF (BVMF:SBFG3) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We note that Grupo SBF S.A. (BVMF:SBFG3) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Grupo SBF

How Much Debt Does Grupo SBF Carry?

As you can see below, at the end of December 2020, Grupo SBF had R$598.9m of debt, up from R$34.6m a year ago. Click the image for more detail. On the flip side, it has R$514.3m in cash leading to net debt of about R$84.6m.

How Healthy Is Grupo SBF's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Grupo SBF had liabilities of R$1.85b due within 12 months and liabilities of R$2.39b due beyond that. Offsetting these obligations, it had cash of R$514.3m as well as receivables valued at R$1.87b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$1.86b.

This deficit isn't so bad because Grupo SBF is worth R$6.94b, 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. Carrying virtually no net debt, Grupo SBF has a very light debt load indeed. 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 SBF can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Grupo SBF had a loss before interest and tax, and actually shrunk its revenue by 5.4%, to R$2.4b. We would much prefer see growth.

Caveat Emptor

Importantly, Grupo SBF had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at R$73m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled R$884m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Grupo SBF is showing 2 warning signs in our investment analysis , you should know about...

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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