Santos Brasil Participações (BVMF:STBP3) Has A Pretty 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.' 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. Importantly, Santos Brasil Participações S.A. (BVMF:STBP3) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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$353.2m at the end of March 2022, a reduction from R$432.1m over a year. But it also has R$1.06b in cash to offset that, meaning it has R$708.0m net cash.

How Healthy Is Santos Brasil Participações' Balance Sheet?

We can see from the most recent balance sheet that Santos Brasil Participações had liabilities of R$531.5m falling due within a year, and liabilities of R$1.97b due beyond that. On the other hand, it had cash of R$1.06b and R$227.1m worth of receivables due within a year. So it has liabilities totalling R$1.21b more than its cash and near-term receivables, combined.

Since publicly traded Santos Brasil Participações shares are worth a total of R$6.68b, 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.

Even more impressive was the fact that Santos Brasil Participações grew its EBIT by 311% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. In the last three years, Santos Brasil Participações's free cash flow amounted to 21% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

Although Santos Brasil Participações'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$708.0m. And it impressed us with its EBIT growth of 311% over the last year. So we don't think Santos Brasil Participações's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Santos Brasil Participações, you may well want to click here to check an interactive graph of its earnings per share history.

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.