These 4 Measures Indicate That Sinqia (BVMF:SQIA3) Is Using Debt Safely

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We can see that Sinqia S.A. (BVMF:SQIA3) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Sinqia

What Is Sinqia's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sinqia had R$33.4m of debt in June 2021, down from R$45.9m, one year before. However, its balance sheet shows it holds R$154.1m in cash, so it actually has R$120.8m net cash.

How Strong Is Sinqia's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Sinqia had liabilities of R$89.0m due within 12 months and liabilities of R$182.1m due beyond that. Offsetting this, it had R$154.1m in cash and R$36.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$80.5m.

Given Sinqia has a market capitalization of R$1.67b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Sinqia also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Sinqia grew its EBIT by 520% 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 company can only pay off debt with cold hard cash, not accounting profits. 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 three 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

We could understand if investors are concerned about Sinqia's liabilities, but we can be reassured by the fact it has has net cash of R$120.8m. The cherry on top was that in converted 111% of that EBIT to free cash flow, bringing in R$20m. So is Sinqia's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Sinqia has 3 warning signs we think you should be aware of.

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.

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.

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