Here’s why Anima Holding (BVMF:ANIM3) has significant debt

Howard Marks said 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 that every practical investor that I know is worried”. 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. We note that Anima Holding SA (BVMF:ANIM3) has a debt on its balance sheet. But the real question is whether this debt makes the business risky.

Why is debt risky?

Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. 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. 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 and debt together.

Discover our latest analysis for Anima Holding

What is Anima Holding’s debt?

You can click on the graph below for historical figures, but it shows that in December 2021, Anima Holding had a debt of R$3.82 billion, an increase of R$888.7 million, on a year. On the other hand, he has R$515.3 million in cash, resulting in a net debt of around R$3.31 billion.

BOVESPA:ANIM3 Debt to equity Historical May 17, 2022

A look at Anima Holding’s liabilities

The latest balance sheet data shows that Anima Holding had liabilities of R$1.24 billion due within one year, and liabilities of R$6.24 billion falling due thereafter. On the other hand, it had cash of R$515.3 million and R$704.5 million in receivables due within one year. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 6.25 billion reais.

This deficit casts a shadow over the company of 2.18 billion reais, like a colossus towering above mere mortals. So we definitely think shareholders need to watch this one closely. After all, Anima Holding would likely need a major recapitalization if it were to pay its creditors today.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.

Anima Holding shareholders are faced with the double whammy of a high net debt to EBITDA ratio (5.5) and a rather low interest coverage, since EBIT is only 1.0 times the interest charge. This means that we would consider him to be heavily indebted. The silver lining is that Anima Holding increased its EBIT by 198% last year, which feeds like youthful idealism. If this earnings trend continues, it will make its leverage much more manageable in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But it is ultimately the company’s future profitability that will decide whether Anima Holding will be able to 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 business needs free cash flow to pay off its debts; book profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Anima Holding’s free cash flow amounted to 41% of its EBIT, less than expected. This low cash conversion makes debt management more difficult.

Our point of view

At first glance, Anima Holding’s interest coverage left us hesitant about the stock, and its level of total liabilities was no more appealing than the single empty restaurant on the busiest night of the year. But at least it’s decent enough to increase its EBIT; it’s encouraging. Overall, it seems to us that Anima Holding’s balance sheet is really a risk for the company. For this reason, we are quite cautious about the stock and believe shareholders should keep a close eye on its liquidity. 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. To do this, you need to find out about the 2 warning signs we spotted with Anima Holding (including 1 that makes us a little uncomfortable).

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.

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John A. Bogar