Is Ambev (BVMF:ABEV3) using too much debt?
Warren Buffett said: “Volatility is far from synonymous with risk. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Like many other companies Ambev S.A. (BVMF:ABEV3) uses debt. But the more important question is: what risk does this debt create?
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. If things go really bad, lenders can take over the business. 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, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Ambev
What is Ambev’s debt?
As you can see below, Ambev had a debt of R$526.9 million in March 2022, compared to R$2.35 billion the previous year. However, he has 14.2 billion reais in cash to offset this, which translates to a net cash of 13.7 billion reais.
How healthy is Ambev’s balance sheet?
We can see from the most recent balance sheet that Ambev had liabilities of R$33.2 billion due in one year, and liabilities of R$14.0 billion due beyond. In return, he had 14.2 billion reais in cash and 6.97 billion reais in debts that had to be paid within 12 months. Thus, its liabilities total R$26.0 billion more than the combination of its cash and short-term receivables.
Given that Ambev has a colossal market cap of R$228.9 billion, it’s hard to believe that these liabilities pose a threat. That said, it is clear that we must continue to monitor its record, lest it deteriorate. While it has liabilities to note, Ambev also has more cash than debt, so we’re pretty confident it can manage its debt safely.
Ambev’s EBIT was pretty stable over the past year, but that shouldn’t be a problem given that it doesn’t have a lot of debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Ambev can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, while the taxman may love accounting profits, lenders only accept cash. Ambev may have net cash on the balance sheet, but it’s always interesting to look at the extent to which the company converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, Ambev has generated free cash flow of a very strong 82% of EBIT, more than we expected. This positions him well to pay off debt if desired.
Although Ambev has more liabilities than liquid assets, it also has a net cash position of 13.7 billion reais. And it impressed us with free cash flow of R$13 billion, or 82% of its EBIT. So is Ambev’s debt a risk? This does not seem to us to be the case. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example – Ambev has 1 warning sign we think you should know.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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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.