TOTVS (BVMF:TOTS3) Seems To Use Debt Rather Sparingly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does TOTVS Carry?

As you can see below, TOTVS had R$1.56b of debt, at June 2025, 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$2.09b in cash, leading to a R$531.3m 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$1.34b due within 12 months and liabilities of R$2.40b due beyond that. Offsetting this, it had R$2.09b in cash and R$682.1m in receivables that were due within 12 months. So its liabilities total R$971.0m more than the combination of its cash and short-term receivables.

Of course, TOTVS has a market capitalization of R$26.5b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, TOTVS boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for TOTVS

In addition to that, we're happy to report that TOTVS has boosted its EBIT by 33%, thus reducing the spectre of future debt repayments. 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 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 98% 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$531.3m. The cherry on top was that in converted 98% of that EBIT to free cash flow, bringing in R$925m. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.