Santos Brasil Participações (BVMF:STBP3) Has A Pretty Healthy Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Santos Brasil Participações S.A. (BVMF:STBP3) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See 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 Santos Brasil Participações had debt of R$292.1m at the end of March 2023, a reduction from R$353.2m over a year. But it also has R$540.5m in cash to offset that, meaning it has R$248.5m net cash.

How Strong Is Santos Brasil Participações' Balance Sheet?

The latest balance sheet data shows that Santos Brasil Participações had liabilities of R$567.5m due within a year, and liabilities of R$1.62b falling due after that. On the other hand, it had cash of R$540.5m and R$222.5m worth of receivables due within a year. So its liabilities total R$1.42b more than the combination of its cash and short-term receivables.

Of course, Santos Brasil Participações has a market capitalization of R$8.37b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Santos Brasil Participações boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Santos Brasil Participações grew its EBIT by 11% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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.

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. In the last three years, Santos Brasil Participações's free cash flow amounted to 49% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Santos Brasil Participações does have more liabilities than liquid assets, it also has net cash of R$248.5m. On top of that, it increased its EBIT by 11% in the last twelve months. So we don't think Santos Brasil Participações's use of debt is risky. 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 instance, we've identified 1 warning sign for Santos Brasil Participações that 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.