Is Guararapes Confecções (BVMF: GUAR3) using too much debt?
Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk that worries me … and every investor practices that I know is worried “. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We notice that Guararapes Confecções SA (BVMF: GUAR3) has a debt on its balance sheet. But does this debt worry shareholders?
When is debt dangerous?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. 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. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
Check out our latest review for Guararapes Confecções
What is the debt of Guararapes Confecções?
You can click on the graph below for historical figures, but it shows that in March 2021, Guararapes Confecções had a debt of 3.86 billion reais, an increase from 2.93 billion reais, on a year. However, he has 2.75 billion reais in cash offsetting this, which leads to a net debt of around 1.11 billion reais.
How healthy is Guararapes Confecções’ track record?
Zooming in on the latest balance sheet data, we can see that Guararapes Confecções had a liability of 4.72 billion reais due within 12 months and a liability of 3.71 billion reais beyond. In compensation for these obligations, it had cash of 2.75 billion reais as well as claims valued at 3.81 billion reais due within 12 months. Thus, its liabilities exceed the sum of its cash and (short-term) receivables by 1.86 billion reais.
Considering that Guararapes Confecções has a market cap of R $ 10.7 billion, it is hard to believe that these liabilities pose a big threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. There is no doubt that we learn the most about debt from the balance sheet. But it is future profits, more than anything, that will determine Guararapes Confecções’ ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
In the past year, Guararapes Confecções has incurred a loss before interest and taxes and has actually reduced its income by 25%, to 5.9 billion reais. It makes us nervous, to say the least.
While Guararapes Confecções’s drop in revenue is about as comforting as a wet blanket, it’s safe to say that its earnings before interest and taxes (EBIT) are even less appealing. Indeed, he lost 179 million reais in EBIT. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. We therefore believe that its record is a bit strained, but not irreparable. We would feel better if he turned his loss of 85 million reais over twelve months into profit. In the meantime, we consider the title to be very risky. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. We have identified 3 warning signs with Guararapes Confecções, and understanding them should be part of your investment process.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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