Is Multilaser Industrial (BVMF:MLAS3) A Risky Investment?

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 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. We can see that Multilaser Industrial S.A. (BVMF:MLAS3) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Multilaser Industrial

How Much Debt Does Multilaser Industrial Carry?

You can click the graphic below for the historical numbers, but it shows that Multilaser Industrial had R$820.2m of debt in December 2023, down from R$1.24b, one year before. But on the other hand it also has R$1.05b in cash, leading to a R$225.8m net cash position.

How Strong Is Multilaser Industrial's Balance Sheet?

We can see from the most recent balance sheet that Multilaser Industrial had liabilities of R$1.22b falling due within a year, and liabilities of R$1.02b due beyond that. On the other hand, it had cash of R$1.05b and R$1.43b worth of receivables due within a year. So it can boast R$239.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Multilaser Industrial could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Multilaser Industrial has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Multilaser Industrial's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Multilaser Industrial had a loss before interest and tax, and actually shrunk its revenue by 20%, to R$3.5b. To be frank that doesn't bode well.

So How Risky Is Multilaser Industrial?

While Multilaser Industrial lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow R$829m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. To that end, you should be aware of the 2 warning signs we've spotted with Multilaser Industrial .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.