Santos Brasil Participações (BVMF:STBP3) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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.

Check out our latest analysis for Santos Brasil Participações

What Is Santos Brasil Participações's Debt?

As you can see below, Santos Brasil Participações had R$432.1m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. But it also has R$1.09b in cash to offset that, meaning it has R$653.0m net cash.

How Healthy Is Santos Brasil Participações' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Santos Brasil Participações had liabilities of R$454.6m due within 12 months and liabilities of R$1.73b due beyond that. On the other hand, it had cash of R$1.09b and R$175.3m worth of receivables due within a year. So it has liabilities totalling R$922.8m more than its cash and near-term receivables, combined.

Of course, Santos Brasil Participações has a market capitalization of R$8.08b, 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. 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.

Also relevant is that Santos Brasil Participações has grown its EBIT by a very respectable 28% in the last year, thus enhancing its ability to pay down debt. 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. 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. During the last three years, Santos Brasil Participações burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While Santos Brasil Participações does have more liabilities than liquid assets, it also has net cash of R$653.0m. And it impressed us with its EBIT growth of 28% over the last year. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Santos Brasil Participações that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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