Allpark Empreendimentos Participações e Serviços (BVMF: ALPK3) is not lacking in debt

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Allpark Empreendimentos, Participações e Serviços SA (BVMF:ALPK3) uses debt. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.

See our latest analysis for Allpark Empreendimentos Participações e Serviços

What is the debt of Allpark Empreendimentos Participações e Serviços?

The graph below, which you can click on for more details, shows that Allpark Empreendimentos Participações e Serviços had a debt of R$853.0 million in December 2021; about the same as the previous year. However, since it has a cash reserve of R$96.4 million, its net debt is less, at around R$756.6 million.

BOVESPA:ALPK3 Debt to equity May 12, 2022

How strong is the balance sheet of Allpark Empreendimentos Participações e Serviços?

According to the last published balance sheet, Allpark Empreendimentos Participações e Serviços had liabilities of R$690.9 million due within 12 months and liabilities of R$1.32 billion due beyond 12 months. On the other hand, it had cash of R$96.4 million and R$171.4 million in receivables due within one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 1.75 billion reais.

The deficiency here weighs heavily on the company itself of 780.4 million reais, like a child struggling under the weight of a huge backpack full of books, his sports equipment and a trumpet . We would therefore be watching his balance sheet closely, no doubt. After all, Allpark Empreendimentos Participações e Serviços would probably need a major recapitalization if it had to pay its creditors today.

We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

A low interest coverage of 0.18 times and an extremely high net debt to EBITDA ratio of 5.2 shook our confidence in Allpark Empreendimentos Participações e Serviços as a double. The debt burden here is considerable. Worse still, Allpark Empreendimentos Participações e Serviços has seen its EBIT drop to 54% in the past 12 months. If earnings continue to follow this trajectory, paying off this debt will be more difficult than convincing us to run a marathon in the rain. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Allpark Empreendimentos Participações e Serviços can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cold hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Allpark Empreendimentos Participações e Serviços has spent a lot of money. While this may be the result of spending for growth, it makes debt much riskier.

Our point of view

At first glance, Allpark Empreendimentos Participações e Serviços’ EBIT growth rate left us hesitant about the stock, and its level of total liabilities was no more attractive than the single empty restaurant on the busiest night of the year. Moreover, its interest coverage also fails to inspire confidence. Considering everything we mentioned above, it is fair to say that Allpark Empreendimentos Participações e Serviços is heavily indebted. If you play with fire, you might get burned, so we’d probably give this stock a wide berth. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Allpark Empreendimentos Participações e Serviços (of which 1 does not suit us too much!) that you should know.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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