Unifique Telecomunicações (BVMF:FIQE3) Seems To Use Debt Quite Sensibly

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Unifique Telecomunicações S.A. (BVMF:FIQE3) makes use of debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Unifique Telecomunicações

How Much Debt Does Unifique Telecomunicações Carry?

You can click the graphic below for the historical numbers, but it shows that Unifique Telecomunicações had R$332.1m of debt in September 2023, down from R$378.4m, one year before. But it also has R$417.8m in cash to offset that, meaning it has R$85.8m net cash.

How Healthy Is Unifique Telecomunicações' Balance Sheet?

The latest balance sheet data shows that Unifique Telecomunicações had liabilities of R$380.9m due within a year, and liabilities of R$513.2m falling due after that. On the other hand, it had cash of R$417.8m and R$152.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$323.4m.

Unifique Telecomunicações has a market capitalization of R$1.55b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Unifique Telecomunicações 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 Unifique Telecomunicações has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Unifique Telecomunicações 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Unifique Telecomunicações 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. In the last three years, Unifique Telecomunicações created free cash flow amounting to 11% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

Although Unifique Telecomunicações's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of R$85.8m. And it impressed us with its EBIT growth of 31% over the last year. So we are not troubled with Unifique Telecomunicações's debt use. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Unifique Telecomunicações's earnings per share history for free.

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.