These 4 Measures Indicate That Locaweb Serviços de Internet (BVMF:LWSA3) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Locaweb Serviços de Internet S.A. (BVMF:LWSA3) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Locaweb Serviços de Internet

What Is Locaweb Serviços de Internet's Debt?

As you can see below, Locaweb Serviços de Internet had R$98.4m of debt at September 2020, down from R$116.5m a year prior. But it also has R$512.9m in cash to offset that, meaning it has R$414.5m net cash.

How Healthy Is Locaweb Serviços de Internet's Balance Sheet?

The latest balance sheet data shows that Locaweb Serviços de Internet had liabilities of R$407.3m due within a year, and liabilities of R$153.6m falling due after that. Offsetting this, it had R$512.9m in cash and R$307.5m in receivables that were due within 12 months. So it actually has R$259.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Locaweb Serviços de Internet could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Locaweb Serviços de Internet boasts net cash, so it's fair to say it does not have a heavy debt load!

We saw Locaweb Serviços de Internet grow its EBIT by 7.0% in the last twelve months. Whilst that hardly knocks our socks off it is a positive when it comes to debt. 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 Locaweb Serviços de Internet 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, a company can only pay off debt with cold hard cash, not accounting profits. Locaweb Serviços de Internet 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, Locaweb Serviços de Internet recorded free cash flow worth 65% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Locaweb Serviços de Internet has net cash of R$414.5m, as well as more liquid assets than liabilities. So we are not troubled with Locaweb Serviços de Internet's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Locaweb Serviços de Internet's earnings per share history for free.

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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