Does Companhia CELG de Participações S/A (BVMF:GPAR3) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Companhia CELG de Participações S/A (BVMF:GPAR3) does carry 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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Companhia CELG de Participações S/A

How Much Debt Does Companhia CELG de Participações S/A Carry?

The image below, which you can click on for greater detail, shows that Companhia CELG de Participações S/A had debt of R$109.1m at the end of September 2020, a reduction from R$1.64b over a year. But on the other hand it also has R$188.4m in cash, leading to a R$79.3m net cash position.

How Healthy Is Companhia CELG de Participações S/A's Balance Sheet?

The latest balance sheet data shows that Companhia CELG de Participações S/A had liabilities of R$134.7m due within a year, and liabilities of R$259.5m falling due after that. Offsetting this, it had R$188.4m in cash and R$279.3m in receivables that were due within 12 months. So it can boast R$73.4m more liquid assets than total liabilities.

This state of affairs indicates that Companhia CELG de Participações S/A's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the R$4.13b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Companhia CELG de Participações S/A boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Companhia CELG de Participações S/A grew its EBIT at 19% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Companhia CELG de Participações S/A will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Companhia CELG de Participações S/A 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. Over the last three years, Companhia CELG de Participações S/A recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Companhia CELG de Participações S/A has net cash of R$79.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 19% over the last year. So we don't have any problem with Companhia CELG de Participações S/A's use of debt. 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. Like risks, for instance. Every company has them, and we've spotted 3 warning signs for Companhia CELG de Participações S/A (of which 2 are a bit concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. 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.
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