Is Sinqia (BVMF:SQIA3) Using Too Much Debt?

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 Sinqia S.A. (BVMF:SQIA3) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Sinqia

What Is Sinqia's Net Debt?

As you can see below, Sinqia had R$42.8m of debt at September 2020, down from R$61.8m a year prior. But on the other hand it also has R$339.7m in cash, leading to a R$297.0m net cash position.

How Healthy Is Sinqia's Balance Sheet?

The latest balance sheet data shows that Sinqia had liabilities of R$67.3m due within a year, and liabilities of R$110.6m falling due after that. Offsetting this, it had R$339.7m in cash and R$28.7m in receivables that were due within 12 months. So it can boast R$190.6m more liquid assets than total liabilities.

This surplus suggests that Sinqia has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Sinqia has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Sinqia made a loss at the EBIT level, last year, it was also good to see that it generated R$1.1m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Sinqia's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sinqia 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. Happily for any shareholders, Sinqia actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Sinqia has net cash of R$297.0m, as well as more liquid assets than liabilities. The cherry on top was that in converted 1,099% of that EBIT to free cash flow, bringing in R$12m. So we don't think Sinqia's use of debt is risky. 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 Sinqia's earnings per share history for free.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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