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StoneCo (NASDAQ:STNE) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that StoneCo Ltd. (NASDAQ:STNE) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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See our latest analysis for StoneCo

What Is StoneCo's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 StoneCo had R$4.90b of debt, an increase on R$2.08b, over one year. However, it also had R$2.87b in cash, and so its net debt is R$2.03b.

NasdaqGS:STNE Historical Debt, October 24th 2019
NasdaqGS:STNE Historical Debt, October 24th 2019

A Look At StoneCo's Liabilities

Zooming in on the latest balance sheet data, we can see that StoneCo had liabilities of R$8.21b due within 12 months and liabilities of R$2.94b due beyond that. On the other hand, it had cash of R$2.87b and R$12.7b worth of receivables due within a year. So it can boast R$4.40b more liquid assets than total liabilities.

This surplus suggests that StoneCo has a conservative balance sheet, and could probably eliminate its debt without much difficulty. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine StoneCo's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year StoneCo wasn't profitable at an EBIT level, but managed to grow its revenue by96%, to R$931m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, StoneCo still had negative earnings before interest and tax (EBIT), over the last year. To be specific the EBIT loss came in at R$87m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd want to see some positive free cashflow before spending much time on trying to understand the stock. So it seems too risky for our taste. For riskier companies like StoneCo I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.