Cury Construtora e Incorporadora (BVMF:CURY3) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Cury Construtora e Incorporadora S.A. (BVMF:CURY3) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company 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.

View our latest analysis for Cury Construtora e Incorporadora

What Is Cury Construtora e Incorporadora's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Cury Construtora e Incorporadora had R$613.4m of debt, an increase on R$481.0m, over one year. However, its balance sheet shows it holds R$721.1m in cash, so it actually has R$107.8m net cash.

A Look At Cury Construtora e Incorporadora's Liabilities

The latest balance sheet data shows that Cury Construtora e Incorporadora had liabilities of R$1.09b due within a year, and liabilities of R$1.01b falling due after that. Offsetting these obligations, it had cash of R$721.1m as well as receivables valued at R$565.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$808.5m.

Of course, Cury Construtora e Incorporadora has a market capitalization of R$5.68b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Cury Construtora e Incorporadora also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Cury Construtora e Incorporadora has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Cury Construtora e Incorporadora's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Cury Construtora e Incorporadora has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Cury Construtora e Incorporadora produced sturdy free cash flow equating to 71% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Cury Construtora e Incorporadora's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of R$107.8m. And we liked the look of last year's 32% year-on-year EBIT growth. So is Cury Construtora e Incorporadora's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Cury Construtora e Incorporadora , and understanding them should be part of your investment process.

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.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.