Sinqia (BVMF:SQIA3) Could Easily Take On More Debt

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Sinqia S.A. (BVMF:SQIA3) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Sinqia

What Is Sinqia's Net Debt?

As you can see below, at the end of December 2021, Sinqia had R$173.6m of debt, up from R$39.6m a year ago. Click the image for more detail. But on the other hand it also has R$561.2m in cash, leading to a R$387.6m net cash position.

How Strong Is Sinqia's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sinqia had liabilities of R$130.4m due within 12 months and liabilities of R$339.0m due beyond that. On the other hand, it had cash of R$561.2m and R$44.3m worth of receivables due within a year. So it can boast R$136.1m more liquid assets than total liabilities.

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

Better yet, Sinqia grew its EBIT by 693% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Sinqia 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. Happily for any shareholders, Sinqia actually produced more free cash flow than EBIT over the last two years. 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 it is always sensible to investigate a company's debt, in this case Sinqia has R$387.6m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of R$34m, being 276% of its EBIT. So we don't think Sinqia's use of debt is risky. 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. Case in point: We've spotted 3 warning signs for Sinqia you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.