Portuaria Cabo Froward (SNSE:FROWARD) Has A Rock Solid 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.' 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. Importantly, Portuaria Cabo Froward S.A. (SNSE:FROWARD) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Portuaria Cabo Froward

How Much Debt Does Portuaria Cabo Froward Carry?

As you can see below, Portuaria Cabo Froward had US$3.00m of debt at December 2023, down from US$5.31m a year prior. However, it does have US$6.15m in cash offsetting this, leading to net cash of US$3.15m.

A Look At Portuaria Cabo Froward's Liabilities

The latest balance sheet data shows that Portuaria Cabo Froward had liabilities of US$9.77m due within a year, and liabilities of US$12.9m falling due after that. Offsetting these obligations, it had cash of US$6.15m as well as receivables valued at US$8.05m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.43m.

Since publicly traded Portuaria Cabo Froward shares are worth a total of US$51.8m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Portuaria Cabo Froward also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that Portuaria Cabo Froward grew its EBIT by 10% last year, making its debt load easier to handle. 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 Portuaria Cabo Froward 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. While Portuaria Cabo Froward has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Portuaria Cabo Froward actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Portuaria Cabo Froward's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$3.15m. And it impressed us with free cash flow of US$11m, being 118% of its EBIT. So we don't think Portuaria Cabo Froward's use of debt is risky. 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. For example, we've discovered 3 warning signs for Portuaria Cabo Froward (1 is concerning!) that you should be aware of before investing here.

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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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.