Does Mills Locação Serviços e Logística (BVMF:MILS3) have a healthy balance sheet?

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Mills Locação, Serviços e Logística SA (BVMF:MILS3) uses debt. But does this debt worry shareholders?

When is debt a problem?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. 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 look at debt levels, we first consider cash and debt levels, together.

Check out our latest review for Mills Locação Serviços e Logística

What is the debt of Mills Locação Serviços e Logística?

As you can see below, at the end of June 2022, Mills Locação Serviços e Logística had a debt of R$424.9 million, compared to R$183.7 million a year ago. Click on the image for more details. But on the other hand, he also has 450.9 million reais in cash, resulting in a net cash position of 26.1 million reais.

BOVESPA:MILS3 Debt to equity October 6, 2022

A look at the responsibilities of Mills Locação Serviços e Logística

Zooming in on the latest balance sheet data, we can see that Mills Locação Serviços e Logística had liabilities of R$213.3 million due within 12 months and liabilities of R$461.1 million due beyond. In return, he had 450.9 million reais in cash and 213.2 million reais in debts which had to be paid within 12 months. These liquid assets therefore roughly correspond to the total liabilities.

Given the size of Mills Locação Serviços e Logística, it appears that its cash is well balanced with its total liabilities. It is therefore very unlikely that the 2.89 billion reais company will run out of cash, but it is still worth keeping an eye on the balance sheet. While it has liabilities of note, Mills Locação Serviços e Logística also has more cash than debt, so we’re pretty confident it can manage its debt safely.

Even better, Mills Locação Serviços e Logística increased its EBIT by 159% last year, which is an impressive improvement. This boost will make it even easier to pay off debt in the future. When analyzing debt levels, the balance sheet is the obvious starting point. But it is the profits of Mills Locação Serviços e Logística that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.

Finally, while the taxman may love accounting profits, lenders only accept cash. Mills Locação Serviços e Logística may have net cash on the balance sheet, but it is always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need of, and its ability to manage debt. Over the past two years, Mills Locação Serviços e Logística has produced strong free cash flow equivalent to 69% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.

Summary

We can understand that investors are worried about the liabilities of Mills Locação Serviços e Logística, but we can take comfort in the fact that it has a net cash position of 26.1 million reais. And we liked the look of EBIT growth of 159% YoY last year. So is Mills Locação Serviços e Logística’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. Know that Mills Locação Serviços e Logística displays 1 warning sign in our investment analysis you should know…

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

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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