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

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.' 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. As with many other companies Santos Brasil Participações S.A. (BVMF:STBP3) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. 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 Net Debt?

The image below, which you can click on for greater detail, shows that Santos Brasil Participações had debt of R$336.7m at the end of December 2022, a reduction from R$393.2m over a year. However, it does have R$614.6m in cash offsetting this, leading to net cash of R$277.9m.

How Healthy Is Santos Brasil Participações' Balance Sheet?

The latest balance sheet data shows that Santos Brasil Participações had liabilities of R$610.5m due within a year, and liabilities of R$1.65b falling due after that. Offsetting this, it had R$614.6m in cash and R$181.6m in receivables that were due within 12 months. So its liabilities total R$1.46b more than the combination of its cash and short-term receivables.

Given Santos Brasil Participações has a market capitalization of R$7.73b, it's hard to believe these liabilities pose much threat. 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!

On top of that, Santos Brasil Participações grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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. Looking at the most recent three years, Santos Brasil Participações recorded free cash flow of 48% of its EBIT, which is weaker 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$277.9m. And it impressed us with its EBIT growth of 42% over the last year. So we don't think Santos Brasil Participações's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Santos Brasil Participações , and understanding them should be part of your investment process.

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.