We Think TOTVS (BVMF:TOTS3) Can Manage Its Debt With Ease

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

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for TOTVS

What Is TOTVS's Net Debt?

The chart below, which you can click on for greater detail, shows that TOTVS had R$1.50b in debt in March 2023; about the same as the year before. But it also has R$2.54b in cash to offset that, meaning it has R$1.04b net cash.

A Look At TOTVS' Liabilities

According to the last reported balance sheet, TOTVS had liabilities of R$2.98b due within 12 months, and liabilities of R$2.66b due beyond 12 months. Offsetting these obligations, it had cash of R$2.54b as well as receivables valued at R$602.2m due within 12 months. So it has liabilities totalling R$2.51b more than its cash and near-term receivables, combined.

Of course, TOTVS has a market capitalization of R$17.8b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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.

On top of that, TOTVS grew its EBIT by 38% over the last twelve months, and that growth will make it easier to handle its debt. 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'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. During the last three years, TOTVS generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While TOTVS does have more liabilities than liquid assets, it also has net cash of R$1.04b. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in R$616m. 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.