These 4 Measures Indicate That Santos Brasil Participações (BVMF:STBP3) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Santos Brasil Participações

How Much Debt Does Santos Brasil Participações Carry?

The image below, which you can click on for greater detail, shows that Santos Brasil Participações had debt of R$409.0m at the end of September 2021, a reduction from R$433.8m over a year. But it also has R$1.13b in cash to offset that, meaning it has R$717.6m net cash.

A Look At Santos Brasil Participações' Liabilities

Zooming in on the latest balance sheet data, we can see that Santos Brasil Participações had liabilities of R$425.9m due within 12 months and liabilities of R$2.06b due beyond that. On the other hand, it had cash of R$1.13b and R$198.5m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$1.16b.

Given Santos Brasil Participações has a market capitalization of R$6.32b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

Better yet, Santos Brasil Participações grew its EBIT by 562% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Considering the last three years, Santos Brasil Participações actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing up

While Santos Brasil Participações does have more liabilities than liquid assets, it also has net cash of R$717.6m. And it impressed us with its EBIT growth of 562% over the last year. So we are not troubled with Santos Brasil Participações's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Santos Brasil Participações 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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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.