Does CSU Cardsystem (BVMF:CARD3) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies CSU Cardsystem S.A. (BVMF:CARD3) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for CSU Cardsystem

What Is CSU Cardsystem's Debt?

As you can see below, at the end of September 2020, CSU Cardsystem had R$48.5m of debt, up from R$33.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds R$87.1m in cash, so it actually has R$38.6m net cash.

How Strong Is CSU Cardsystem's Balance Sheet?

The latest balance sheet data shows that CSU Cardsystem had liabilities of R$148.7m due within a year, and liabilities of R$92.7m falling due after that. Offsetting this, it had R$87.1m in cash and R$74.8m in receivables that were due within 12 months. So its liabilities total R$79.6m more than the combination of its cash and short-term receivables.

Since publicly traded CSU Cardsystem shares are worth a total of R$635.5m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, CSU Cardsystem boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, CSU Cardsystem grew its EBIT by 80% over the last twelve months, and that growth will make it easier to handle its debt. 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 CSU Cardsystem 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. CSU Cardsystem may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, CSU Cardsystem recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although CSU Cardsystem's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of R$38.6m. And we liked the look of last year's 80% year-on-year EBIT growth. So is CSU Cardsystem's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with CSU Cardsystem , and understanding them should be part of your investment process.

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. 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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