These 4 Measures Indicate That CSU Cardsystem (BVMF:CARD3) Is Using Debt Safely

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies CSU Cardsystem S.A. (BVMF:CARD3) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for CSU Cardsystem

How Much Debt Does CSU Cardsystem Carry?

You can click the graphic below for the historical numbers, but it shows that CSU Cardsystem had R$30.9m of debt in December 2021, down from R$45.6m, one year before. But on the other hand it also has R$83.3m in cash, leading to a R$52.4m net cash position.

How Strong Is CSU Cardsystem's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CSU Cardsystem had liabilities of R$142.2m due within 12 months and liabilities of R$84.3m due beyond that. Offsetting these obligations, it had cash of R$83.3m as well as receivables valued at R$70.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$72.5m.

Since publicly traded CSU Cardsystem shares are worth a total of R$655.8m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, CSU Cardsystem boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that CSU Cardsystem has been able to increase its EBIT by 29% 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 it is CSU Cardsystem's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, CSU Cardsystem generated free cash flow amounting to a very robust 89% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

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$52.4m. And it impressed us with free cash flow of R$66m, being 89% of its EBIT. So we don't think CSU Cardsystem's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that CSU Cardsystem is showing 2 warning signs in our investment analysis , you should know about...

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. 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.