Stock Analysis

Triunfo Participações e Investimentos (BVMF:TPIS3) Has Debt But No Earnings; Should You Worry?

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Triunfo Participações e Investimentos S.A. (BVMF:TPIS3) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Triunfo Participações e Investimentos

What Is Triunfo Participações e Investimentos's Debt?

As you can see below, Triunfo Participações e Investimentos had R$1.71b of debt at September 2021, down from R$1.92b a year prior. However, it does have R$78.0m in cash offsetting this, leading to net debt of about R$1.63b.

BOVESPA:TPIS3 Debt to Equity History January 7th 2022

How Strong Is Triunfo Participações e Investimentos' Balance Sheet?

According to the last reported balance sheet, Triunfo Participações e Investimentos had liabilities of R$561.0m due within 12 months, and liabilities of R$1.74b due beyond 12 months. Offsetting this, it had R$78.0m in cash and R$85.3m in receivables that were due within 12 months. So it has liabilities totalling R$2.13b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the R$327.9m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Triunfo Participações e Investimentos would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Triunfo Participações e Investimentos's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Triunfo Participações e Investimentos reported revenue of R$1.1b, which is a gain of 6.0%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Triunfo Participações e Investimentos had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost R$20m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But on the bright side the company actually produced a statutory profit of R$291m and free cash flow of R$133m. So its situation may not be as precarious as the EBIT would imply. 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. Be aware that Triunfo Participações e Investimentos is showing 5 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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