We Think Locaweb Serviços de Internet (BVMF:LWSA3) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Locaweb Serviços de Internet S.A. (BVMF:LWSA3) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, 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$48.6m of debt at June 2021, down from R$123.7m a year prior. But on the other hand it also has R$1.89b in cash, leading to a R$1.84b net cash position.

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

According to the last reported balance sheet, Locaweb Serviços de Internet had liabilities of R$518.1m due within 12 months, and liabilities of R$559.2m due beyond 12 months. On the other hand, it had cash of R$1.89b and R$427.6m worth of receivables due within a year. So it actually has R$1.24b 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!

Fortunately, Locaweb Serviços de Internet grew its EBIT by 3.8% in the last year, making that debt load look even more manageable. 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 Locaweb Serviços de Internet 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Locaweb Serviços de Internet 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. Over the most recent three years, Locaweb Serviços de Internet recorded free cash flow worth 56% 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

While it is always sensible to investigate a company's debt, in this case Locaweb Serviços de Internet has R$1.84b in net cash and a decent-looking balance sheet. So we don't think Locaweb Serviços de Internet'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. We've identified 4 warning signs with Locaweb Serviços de Internet , 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.