Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. We can see that Grendene SA (BVMF: GRND3) uses debt in its activity. But the most important question is: what risk does this debt create?
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest analysis for Grendene
What is Grendene’s debt?
As you can see below, Grendene had a debt of R $ 9.80 million in March 2021, up from R $ 229.2 million the year before. However, his balance sheet shows that he holds R $ 1.66 billion in cash, so he actually has R $ 1.65 billion in net cash.
Is Grendene’s track record healthy?
We can see from the most recent balance sheet that Grendene had liabilities of R $ 739.3 million due within one year and liabilities of R $ 92.4 million beyond. In compensation for these obligations, it had cash of R $ 1.66 billion as well as claims valued at R $ 1.14 billion due within 12 months. So he actually has R $ 1.96 billion After liquid assets as total liabilities.
It’s good to see that Grendene has a lot of cash on her balance sheet, which suggests careful liability management. Because he has a lot of assets, he is unlikely to have any problems with his lenders. Simply put, the fact that Grendene has more cash than debt is arguably a good indication that she can manage her debt safely.
Fortunately, Grendene’s load is not too heavy, as its EBIT has fallen by 28% compared to last year. When a business sees its profits accumulate, it can sometimes see its relationship with its lenders deteriorate. There is no doubt that we learn the most about debt from the balance sheet. But it is Grendene’s earnings that will influence how the balance sheet looks going in the future. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. Grendene may have net cash on the balance sheet, but it’s always interesting to see how well the business converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Grendene has generated strong free cash flow equivalent to 61% of its EBIT, roughly what we expected. This hard cash allows him to reduce his debt whenever he wants.
While it’s always a good idea to investigate a company’s debt, in this case Grendene has R $ 1.65 billion in net cash and a decent balance sheet. So we have no problem with Grendene’s use of debt. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Know that Grendene shows 4 warning signs in our investment analysis , and 1 of them concerns …
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.
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