CSU Cardsystem (BVMF:CARD3) Has A Rock Solid 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 CSU Cardsystem S.A. (BVMF:CARD3) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CSU Cardsystem

What Is CSU Cardsystem's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 CSU Cardsystem had debt of R$42.8m, up from R$30.9m in one year. But it also has R$69.6m in cash to offset that, meaning it has R$26.8m net cash.

How Healthy Is CSU Cardsystem's Balance Sheet?

According to the last reported balance sheet, CSU Cardsystem had liabilities of R$137.2m due within 12 months, and liabilities of R$99.8m due beyond 12 months. Offsetting these obligations, it had cash of R$69.6m as well as receivables valued at R$72.9m due within 12 months. So its liabilities total R$94.6m more than the combination of its cash and short-term receivables.

Given CSU Cardsystem has a market capitalization of R$982.1m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, CSU Cardsystem also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that CSU Cardsystem has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if CSU Cardsystem 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While CSU Cardsystem 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. During the last three years, CSU Cardsystem produced sturdy free cash flow equating to 76% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing up

We could understand if investors are concerned about CSU Cardsystem's liabilities, but we can be reassured by the fact it has has net cash of R$26.8m. And it impressed us with its EBIT growth of 46% over the last year. So we don't think CSU Cardsystem's use of debt is risky. 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 instance, we've identified 2 warning signs for CSU Cardsystem that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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