We Think Companhia CELG de Participações S/A (BVMF:GPAR3) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Companhia CELG de Participações S/A (BVMF:GPAR3) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Companhia CELG de Participações S/A

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

The image below, which you can click on for greater detail, shows that Companhia CELG de Participações S/A had debt of R$106.4m at the end of December 2020, a reduction from R$1.64b over a year. But on the other hand it also has R$150.0m in cash, leading to a R$43.6m net cash position.

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

Zooming in on the latest balance sheet data, we can see that Companhia CELG de Participações S/A had liabilities of R$94.9m due within 12 months and liabilities of R$520.3m due beyond that. Offsetting this, it had R$150.0m in cash and R$244.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$221.0m.

Given Companhia CELG de Participações S/A has a market capitalization of R$5.14b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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!

Even more impressive was the fact that Companhia CELG de Participações S/A grew its EBIT by 117% 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 you can't view debt in total isolation; since Companhia CELG de Participações S/A will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 created free cash flow amounting to 14% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing up

We could understand if investors are concerned about Companhia CELG de Participações S/A's liabilities, but we can be reassured by the fact it has has net cash of R$43.6m. And it impressed us with its EBIT growth of 117% over the last year. So is Companhia CELG de Participações S/A's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. 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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