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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Santos Brasil Participações S.A. (BVMF:STBP3) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Santos Brasil Participações

What Is Santos Brasil Participações's Debt?

As you can see below, Santos Brasil Participações had R$340.2m of debt at June 2022, down from R$410.7m a year prior. But it also has R$1.02b in cash to offset that, meaning it has R$678.0m net cash.

How Healthy Is Santos Brasil Participações' Balance Sheet?

The latest balance sheet data shows that Santos Brasil Participações had liabilities of R$503.8m due within a year, and liabilities of R$2.20b falling due after that. Offsetting these obligations, it had cash of R$1.02b as well as receivables valued at R$260.0m due within 12 months. So its liabilities total R$1.42b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Santos Brasil Participações is worth R$7.01b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 145% over twelve months. 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 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. Looking at the most recent three years, Santos Brasil Participações recorded free cash flow of 32% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

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$678.0m. And it impressed us with its EBIT growth of 145% over the last year. So we don't think Santos Brasil Participações's use of debt is risky. 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 1 warning sign 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.