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

Warren Buffett famously said, '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. We can see that Santos Brasil Participações S.A. (BVMF:STBP3) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Santos Brasil Participações

What Is Santos Brasil Participações's Debt?

The image below, which you can click on for greater detail, shows that at September 2023 Santos Brasil Participações had debt of R$422.2m, up from R$331.5m in one year. But on the other hand it also has R$569.6m in cash, leading to a R$147.3m net cash position.

A Look At Santos Brasil Participações' Liabilities

The latest balance sheet data shows that Santos Brasil Participações had liabilities of R$646.2m due within a year, and liabilities of R$1.75b falling due after that. Offsetting these obligations, it had cash of R$569.6m as well as receivables valued at R$272.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$1.55b.

Since publicly traded Santos Brasil Participações shares are worth a total of R$9.10b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 the other hand, Santos Brasil Participações saw its EBIT drop by 5.6% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Santos Brasil Participações 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. 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. Over the most recent three years, Santos Brasil Participações recorded free cash flow worth 52% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Santos Brasil Participações does have more liabilities than liquid assets, it also has net cash of R$147.3m. So we don't have any problem with Santos Brasil Participações's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Santos Brasil Participações has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.