Down Debt

Does Fleury (BVMF:FLRY3) use too much 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. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Fleury SA (BVMF: FLRY3) is in debt. But the more important question is: what risk does this debt create?

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.

Discover our latest analyzes for Fleury

What is Fleury’s net debt?

As you can see below, at the end of December 2021, Fleury had a debt of R$2.12 billion, compared to R$1.90 billion a year ago. Click on the image for more details. However, since it has a cash reserve of 797.1 million reais, its net debt is less, at around 1.33 billion reais.

BOVESPA: FLRY3 Debt to equity April 10, 2022

How healthy is Fleury’s balance sheet?

The latest balance sheet data shows that Fleury had liabilities of R$1.21 billion due within one year, and liabilities of R$3.01 billion falling due thereafter. In return, he had 797.1 million reais in cash and 811.5 million reais in debt due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 2.61 billion reais.

While that might sound like a lot, it’s not too bad since Fleury has a market capitalization of R$5.01 billion, so it could probably bolster its balance sheet by raising capital if needed. But it is clear that it must be carefully examined whether he can manage his debt without dilution.

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). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Given its net debt to EBITDA of 1.4 and its interest coverage of 4.5 times, it seems to us that Fleury is probably using debt quite sensibly. But the interest payments are certainly enough to make us think about the affordability of its debt. Above all, Fleury has increased its EBIT by 35% over the last twelve months, and this growth will make it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is ultimately the company’s future profitability that will decide whether Fleury 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. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Fleury has generated free cash flow of a very strong 92% of its EBIT, more than we expected. This positions him well to pay off debt if desired.

Our point of view

Fortunately, Fleury’s impressive EBIT to free cash flow conversion means it has the upper hand on its debt. But, on a darker note, we’re a bit concerned about his total passive level. It should also be noted that companies in the health sector like Fleury routinely use debt without any problem. When we consider the range of factors above, it seems that Fleury is quite sensible with his use of debt. While this carries some risk, it can also improve shareholder returns. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 3 warning signs we spotted with Fleury.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

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.