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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that Multilaser Industrial S.A. (BVMF:MLAS3) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Multilaser Industrial

What Is Multilaser Industrial's Debt?

The image below, which you can click on for greater detail, shows that Multilaser Industrial had debt of R$711.5m at the end of June 2024, a reduction from R$1.21b over a year. But it also has R$1.04b in cash to offset that, meaning it has R$323.7m net cash.

A Look At Multilaser Industrial's Liabilities

According to the last reported balance sheet, Multilaser Industrial had liabilities of R$1.28b due within 12 months, and liabilities of R$794.7m due beyond 12 months. Offsetting these obligations, it had cash of R$1.04b as well as receivables valued at R$1.40b due within 12 months. So it can boast R$355.2m more liquid assets than total liabilities.

This excess liquidity suggests that Multilaser Industrial is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. 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 ultimately the future profitability of the business will decide if Multilaser Industrial 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.

Over 12 months, Multilaser Industrial made a loss at the EBIT level, and saw its revenue drop to R$3.3b, which is a fall of 17%. We would much prefer see growth.

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$696m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Multilaser Industrial is showing 1 warning sign in our investment analysis , you should know about...

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.