These 4 Measures Indicate That Grupo SBF (BVMF:SBFG3) Is Using Debt Extensively

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 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 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?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Grupo SBF

What Is Grupo SBF's Debt?

As you can see below, at the end of September 2021, Grupo SBF had R$885.0m of debt, up from R$604.4m a year ago. Click the image for more detail. However, because it has a cash reserve of R$561.0m, its net debt is less, at about R$324.0m.

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$2.25b due within 12 months and liabilities of R$2.68b due beyond that. On the other hand, it had cash of R$561.0m and R$2.13b worth of receivables due within a year. So its liabilities total R$2.24b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Grupo SBF has a market capitalization of R$5.57b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Grupo SBF has a very low debt to EBITDA ratio of 0.88 so it is strange to see weak interest coverage, with last year's EBIT being only 1.4 times the interest expense. So one way or the other, it's clear the debt levels are not trivial. If Grupo SBF can keep growing EBIT at last year's rate of 16% over the last year, then it will find its debt load easier to manage. 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 SBF's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Grupo SBF burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Both Grupo SBF's conversion of EBIT to free cash flow and its interest cover were discouraging. But its not so bad at managing its debt, based on its EBITDA,. Taking the abovementioned factors together we do think Grupo SBF's debt poses some risks to the business. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Grupo SBF (1 is concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.