Is Santos Brasil Participações (BVMF:STBP3) A Risky Investment?

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.' 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 Santos Brasil Participações S.A. (BVMF:STBP3) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Santos Brasil Participações

How Much Debt Does Santos Brasil Participações Carry?

As you can see below, Santos Brasil Participações had R$297.0m of debt at June 2023, down from R$340.2m a year prior. However, it does have R$474.5m in cash offsetting this, leading to net cash of R$177.5m.

How Strong Is Santos Brasil Participações' Balance Sheet?

According to the last reported balance sheet, Santos Brasil Participações had liabilities of R$622.1m due within 12 months, and liabilities of R$1.59b due beyond 12 months. Offsetting this, it had R$474.5m in cash and R$269.3m in receivables that were due within 12 months. So its liabilities total R$1.47b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Santos Brasil Participações is worth R$6.52b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Santos Brasil Participações boasts net cash, so it's fair to say it does not have a heavy debt load!

Santos Brasil Participações's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Santos Brasil Participações'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Santos Brasil Participações may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Santos Brasil Participações recorded free cash flow of 47% 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$177.5m. So we don't have any problem with Santos Brasil Participações's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Santos Brasil Participações you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.