Does TOTVS (BVMF:TOTS3) Have A Healthy Balance Sheet?

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 note that TOTVS S.A. (BVMF:TOTS3) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for TOTVS

What Is TOTVS's Debt?

As you can see below, TOTVS had R$1.53b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has R$3.06b in cash, leading to a R$1.53b net cash position.

How Healthy Is TOTVS' Balance Sheet?

The latest balance sheet data shows that TOTVS had liabilities of R$1.30b due within a year, and liabilities of R$2.45b falling due after that. On the other hand, it had cash of R$3.06b and R$596.2m worth of receivables due within a year. So its liabilities total R$90.7m more than the combination of its cash and short-term receivables.

Having regard to TOTVS' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the R$18.4b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, TOTVS also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that TOTVS grew its EBIT by 18% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TOTVS 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 TOTVS 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 last three years, TOTVS recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

We could understand if investors are concerned about TOTVS's liabilities, but we can be reassured by the fact it has has net cash of R$1.53b. And it impressed us with free cash flow of R$672m, being 87% of its EBIT. So is TOTVS's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in TOTVS, you may well want to click here to check an interactive graph of its earnings per share history.

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. 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.