David Iben put it right when he said: “Volatility is not a risk that is close to our hearts. What matters to us is to avoid the permanent loss of capital. So it seems like smart money knows that debt – which is usually linked to bankruptcies – is a very important factor, when you assess the risk level of a business. We can see that CSU Cardsystem SA (BVMF: CARD3) uses debt in his business. But should shareholders be concerned about its use of debt?
Why is debt risky?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap stock price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its advantage. When we look at debt levels, we first look at cash and debt levels, together.
Check out our latest review for CSU Cardsystem
What is CSU Cardsystem’s net debt?
The image below, which you can click for more details, shows that in March 2021, CSU Cardsystem was in debt of R $ 42.8 million, up from R $ 30.9 million in one year. But he also has 69.6 million reais in cash to compensate for this, which means he has a net cash of 26.8 million reais.
How healthy is CSU Cardsystem’s track record?
According to the latest published balance sheet, CSU Cardsystem had liabilities of R $ 137.2 million due within 12 months and liabilities of R $ 99.8 million beyond 12 months. In return for these obligations, he had cash of R $ 69.6 million as well as receivables valued at R $ 72.9 million due within 12 months. Thus, its liabilities total 94.6 million reais more than the combination of its cash and short-term receivables.
Considering that CSU Cardsystem has a market cap of R $ 982.1 million, it is hard to believe that these liabilities pose a significant threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward. While it has some liabilities to note, CSU Cardsystem also has more cash than debt, so we’re pretty confident it can handle its debt safely.
On top of that, we are happy to report that CSU Cardsystem has increased its EBIT by 46%, reducing the specter of future debt repayments. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether CSU Cardsystem can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
Finally, while the tax authorities love accounting profits, lenders only accept cash. While CSU Cardsystem has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erodes) that cash. balanced. Over the past three years, CSU Cardsystem has produced a solid free cash flow equivalent to 76% of its EBIT, which is what we expected. This hard, cold cash flow means he can reduce his debt whenever he wants.
We could understand if investors are concerned about the responsibilities of CSU Cardsystem, but we can be reassured that it has a net cash position of R $ 26.8 million. And it impressed us with its EBIT growth of 46% over last year. We therefore do not believe that CSU Cardsystem’s use of debt is risky. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 2 warning signs for CSU Cardsystem that you need to be aware of.
If you want to invest in companies that can generate profits without the burden of debt, take a look at this free list of growing companies that have net cash on the balance sheet.
If you are looking for stocks to buy, use the cheapest platform * ranked # 1 overall by Barron’s, Interactive brokers. Trade stocks, options, futures, currencies, bonds and funds in 135 markets, all from one integrated account.
This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative information. Simply Wall St has no position in any of the stocks mentioned.
*Interactive Brokers ranked Least Expensive Broker by StockBrokers.com Annual Online Review 2020
Do you have any comments on this article? Concerned about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.