TOTVS (BVMF:TOTS3) Has A Rock Solid Balance Sheet

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 TOTVS S.A. (BVMF:TOTS3) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for TOTVS

How Much Debt Does TOTVS Carry?

The image below, which you can click on for greater detail, shows that TOTVS had debt of R$1.52b at the end of June 2022, a reduction from R$1.60b over a year. But on the other hand it also has R$2.57b in cash, leading to a R$1.05b net cash position.

A Look At TOTVS' Liabilities

Zooming in on the latest balance sheet data, we can see that TOTVS had liabilities of R$3.53b due within 12 months and liabilities of R$2.09b due beyond that. On the other hand, it had cash of R$2.57b and R$586.2m worth of receivables due within a year. So it has liabilities totalling R$2.46b more than its cash and near-term receivables, combined.

Since publicly traded TOTVS shares are worth a total of R$17.8b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

In addition to that, we're happy to report that TOTVS has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TOTVS'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. TOTVS 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. Over the most recent three years, TOTVS recorded free cash flow worth 74% 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 TOTVS does have more liabilities than liquid assets, it also has net cash of R$1.05b. And it impressed us with its EBIT growth of 31% over the last year. So we don't think TOTVS's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - TOTVS has 1 warning sign 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.

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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.