These 4 Measures Indicate That Companhia CELG de Participações S/A (BVMF:GPAR3) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Companhia CELG de Participações S/A (BVMF:GPAR3) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 Companhia CELG de Participações S/A

What Is Companhia CELG de Participações S/A's Debt?

You can click the graphic below for the historical numbers, but it shows that Companhia CELG de Participações S/A had R$97.2m of debt in December 2021, down from R$106.4m, one year before. However, it does have R$258.0m in cash offsetting this, leading to net cash of R$160.7m.

A Look At Companhia CELG de Participações S/A's Liabilities

Zooming in on the latest balance sheet data, we can see that Companhia CELG de Participações S/A had liabilities of R$119.1m due within 12 months and liabilities of R$519.2m due beyond that. Offsetting this, it had R$258.0m in cash and R$222.2m in receivables that were due within 12 months. So its liabilities total R$158.2m more than the combination of its cash and short-term receivables.

Since publicly traded Companhia CELG de Participações S/A shares are worth a total of R$2.57b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, 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 13% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Companhia CELG de Participações S/A's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. In the last three years, Companhia CELG de Participações S/A's free cash flow amounted to 36% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Companhia CELG de Participações S/A has R$160.7m in net cash. On top of that, it increased its EBIT by 13% in the last twelve months. So is Companhia CELG de Participações S/A's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 2 warning signs we've spotted with Companhia CELG de Participações S/A (including 1 which makes us a bit uncomfortable) .

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. 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.