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 seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Ambev SA (BVMF: ABEV3) is in debt. But the most important question is: what risk does this debt create?
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. 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. When we look at debt levels, we first consider both liquidity and debt levels.
Check out our latest analysis for Ambev
What is Ambev’s debt?
As you can see below, Ambev had a debt of R $ 681.5 million in June 2021, up from R $ 5.16 billion the year before. But he also has R $ 14.5 billion in cash to compensate for this, which means he has R $ 13.8 billion in net cash.
Is Ambev’s track record healthy?
According to the latest published balance sheet, Ambev had liabilities of R $ 28.8 billion due within 12 months and liabilities of R $ 15.5 billion due beyond 12 months. In compensation for these obligations, he had cash of 14.5 billion reais as well as debts valued at 6.57 billion reais due within 12 months. Thus, its liabilities total 23.3 billion reais more than the combination of its cash and short-term receivables.
Given that Ambev has a whopping market cap of R $ 244.4 billion, it’s hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. Despite her notable liabilities, Ambev has a net cash flow, so it’s fair to say that she doesn’t have a lot of debt!
Equally positive, Ambev has increased its EBIT by 21% over the past year, which should make it easier to pay down debt going forward. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Ambev can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts‘ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. While Ambev has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) into free cash flow, to help us understand how fast it’s building ( or erodes) that cash balance. . Over the past three years, Ambev has recorded free cash flow totaling 86% of its EBIT, which is higher than what we normally expect. This puts him in a very strong position to pay off the debt.
While it always makes sense to look at a company’s total liabilities, it is very reassuring that Ambev has R $ 13.8 billion in net cash. And he impressed us with free cash flow of R $ 15 billion, or 86% of his EBIT. So is Ambev’s debt a risk? It does not seem to us. 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. We have identified 2 warning signs with Ambev, and understanding them should be part of your investment process.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash-flow-growing stocks today.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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