We Think Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Companhia de Saneamento Básico do Estado de São Paulo - SABESP (BVMF:SBSP3) does use debt in its business. But the real question is whether this debt is making the company risky.

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When Is Debt A Problem?

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. 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. 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.

What Is Companhia de Saneamento Básico do Estado de São Paulo - SABESP's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2025 Companhia de Saneamento Básico do Estado de São Paulo - SABESP had debt of R$30.8b, up from R$21.3b in one year. On the flip side, it has R$7.93b in cash leading to net debt of about R$22.9b.

How Strong Is Companhia de Saneamento Básico do Estado de São Paulo - SABESP's Balance Sheet?

The latest balance sheet data shows that Companhia de Saneamento Básico do Estado de São Paulo - SABESP had liabilities of R$10.5b due within a year, and liabilities of R$37.8b falling due after that. Offsetting these obligations, it had cash of R$7.93b as well as receivables valued at R$4.94b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$35.4b.

While this might seem like a lot, it is not so bad since Companhia de Saneamento Básico do Estado de São Paulo - SABESP has a huge market capitalization of R$89.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

See our latest analysis for Companhia de Saneamento Básico do Estado de São Paulo - SABESP

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Companhia de Saneamento Básico do Estado de São Paulo - SABESP has a low net debt to EBITDA ratio of only 1.2. And its EBIT easily covers its interest expense, being 23.3 times the size. So we're pretty relaxed about its super-conservative use of debt. Even more impressive was the fact that Companhia de Saneamento Básico do Estado de São Paulo - SABESP grew its EBIT by 130% over twelve months. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Companhia de Saneamento Básico do Estado de São Paulo - SABESP's ability to maintain a healthy balance sheet going forward. 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. So it's worth checking how much of that EBIT is backed by free cash flow. Considering the last three years, Companhia de Saneamento Básico do Estado de São Paulo - SABESP actually recorded a cash outflow, overall. 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.

Our View

Happily, Companhia de Saneamento Básico do Estado de São Paulo - SABESP's impressive interest cover implies it has the upper hand on its debt. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. We would also note that Water Utilities industry companies like Companhia de Saneamento Básico do Estado de São Paulo - SABESP commonly do use debt without problems. All these things considered, it appears that Companhia de Saneamento Básico do Estado de São Paulo - SABESP can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. 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. For instance, we've identified 2 warning signs for Companhia de Saneamento Básico do Estado de São Paulo - SABESP (1 makes us a bit uncomfortable) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.