Here's Why Telefônica Brasil (BVMF:VIVT3) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Telefônica Brasil S.A. (BVMF:VIVT3) makes use of debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Telefônica Brasil

How Much Debt Does Telefônica Brasil Carry?

As you can see below, Telefônica Brasil had R$5.08b of debt at March 2024, down from R$7.40b a year prior. However, it does have R$6.76b in cash offsetting this, leading to net cash of R$1.67b.

How Healthy Is Telefônica Brasil's Balance Sheet?

The latest balance sheet data shows that Telefônica Brasil had liabilities of R$23.3b due within a year, and liabilities of R$31.9b falling due after that. On the other hand, it had cash of R$6.76b and R$12.3b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$36.1b.

Telefônica Brasil has a very large market capitalization of R$81.8b, 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, Telefônica Brasil also has more cash than debt, so we're pretty confident it can manage its debt safely.

We note that Telefônica Brasil grew its EBIT by 22% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Telefônica Brasil'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 Telefônica Brasil 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. Happily for any shareholders, Telefônica Brasil actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Telefônica Brasil does have more liabilities than liquid assets, it also has net cash of R$1.67b. The cherry on top was that in converted 127% of that EBIT to free cash flow, bringing in R$9.4b. So we don't have any problem with Telefônica Brasil's use of debt. 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 1 warning sign we've spotted with Telefônica Brasil .

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.

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