Does Santos Brasil Participações (BVMF:STBP3) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Santos Brasil Participações S.A. (BVMF:STBP3) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Santos Brasil Participações

What Is Santos Brasil Participações's Net Debt?

The image below, which you can click on for greater detail, shows that Santos Brasil Participações had debt of R$331.5m at the end of September 2022, a reduction from R$409.0m over a year. But it also has R$756.1m in cash to offset that, meaning it has R$424.6m net cash.

How Strong Is Santos Brasil Participações' Balance Sheet?

The latest balance sheet data shows that Santos Brasil Participações had liabilities of R$521.3m due within a year, and liabilities of R$2.30b falling due after that. Offsetting these obligations, it had cash of R$756.1m as well as receivables valued at R$250.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$1.82b.

While this might seem like a lot, it is not so bad since Santos Brasil Participações has a market capitalization of R$6.84b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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, Santos Brasil Participações also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Santos Brasil Participações grew its EBIT by 83% over the last twelve months, and that growth will make it easier to handle its debt. 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 Santos Brasil Participações 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Santos Brasil Participações 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. Looking at the most recent three years, Santos Brasil Participações recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Santos Brasil Participações does have more liabilities than liquid assets, it also has net cash of R$424.6m. And it impressed us with its EBIT growth of 83% over the last year. So is Santos Brasil Participações's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Santos Brasil Participações that you should be aware of.

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.