Is Grupo SBF (BVMF:SBFG3) taking on too much debt?

Warren Buffett famously said, “Volatility is far from synonymous with risk.” It’s only natural to consider a company’s balance sheet when considering how risky it is, since debt is often involved when a company collapses. We take note of that Grupo SBF SA (BVMF:SBFG3) has debt on its balance sheet. But is this debt a problem for shareholders?

When is debt dangerous?

Debt is a tool that helps companies grow. However, if a company is unable to repay its lenders, it is at their mercy. If the company can’t meet its legal obligations to pay down debt, shareholders could end up with nothing. However, a more common (but still costly) situation is where a company must dilute shareholders at a cheap share price just to get debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When considering how much debt a company has, you first need to consider its cash flow and debt together.

Check out our latest analysis for Grupo SBF

How high is Grupo SBF’s net debt?

You can click on the graphic below to see the historical numbers. However, it shows that Grupo SBF had debts of R$1.35 billion as of September 2024, up from R$1.70 billion a year earlier. However, the company also had R$765.3m in cash, so its net debt is R$583.8m.

How strong is Grupo SBF’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Grupo SBF had liabilities of R$2.72b due within 12 months and liabilities of R$2.73b due within 12 months. which were due beyond that. On the other hand, it had cash of R$765.3m and R$1.85b worth of receivables due within a year. So its liabilities total R$2.84b more than the combination of its cash and short-term receivables.

This is huge leverage relative to the market capitalization of R$2.89 billion. This suggests that shareholders would be severely diluted if the company had to rush to shore up its balance sheet.

We use two main ratios to inform us about the level of debt relative to profits. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times earnings before interest and tax (EBIT) cover interest expense (or interest cover, for short). . The advantage of this approach is that we take into account both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio).

Given that net debt is just 0.79 times EBITDA, it’s initially surprising that Grupo SBF’s EBIT has a low interest coverage of 2.2. While we’re not necessarily worried, we think the debt is far from trivial. We note that Grupo SBF grew its EBIT by 24% last year, which should make it easier to pay off debt in the future. There is no doubt that the balance sheet is where we learn the most about debt. However, the company’s future profitability will ultimately determine whether Grupo SBF can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay off its debts with paper profits; it takes cash. So it’s worth checking how much of that EBIT is covered by free cash flow. Looking over the last three years, Grupo SBF recorded free cash flow of 49% of its EBIT, which is weaker than we’d expect. That’s not great when it comes to paying off debt.

Our view

We are somewhat concerned about Grupo SBF’s difficulty interest coverage, but we also have positive aspects to focus on. Both the EBIT growth rate and net debt to EBITDA were encouraging signs. From all the above points of view, it seems to us that Grupo SBF is a somewhat risky investment due to its debt. Not all risk is bad, as it can boost stock price returns if it pays off, but this debt risk is worth keeping an eye on. There is no doubt that the balance sheet is where we learn the most about debt. However, not all investment risks lie on the balance sheet – quite the opposite. Note that Grupo SBF is displayed 1 warning sign in our investment analysis you should know that…

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 immediately.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term focused analysis based on fundamental data. Note that our analysis may not reflect the latest price-sensitive company announcements or qualitative material. Simply Wall St has no positions in any stocks mentioned.