Mills Estruturas e Serviços de Engenharia (BVMF:MILS3) Could Easily Take On More Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Mills Estruturas e Serviços de Engenharia S.A. (BVMF:MILS3) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Mills Estruturas e Serviços de Engenharia

What Is Mills Estruturas e Serviços de Engenharia's Debt?

As you can see below, at the end of March 2021, Mills Estruturas e Serviços de Engenharia had R$201.6m of debt, up from R$187.6m a year ago. Click the image for more detail. However, it does have R$392.5m in cash offsetting this, leading to net cash of R$190.9m.

How Strong Is Mills Estruturas e Serviços de Engenharia's Balance Sheet?

The latest balance sheet data shows that Mills Estruturas e Serviços de Engenharia had liabilities of R$169.0m due within a year, and liabilities of R$218.7m falling due after that. Offsetting these obligations, it had cash of R$392.5m as well as receivables valued at R$118.0m due within 12 months. So it can boast R$122.8m more liquid assets than total liabilities.

This short term liquidity is a sign that Mills Estruturas e Serviços de Engenharia could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Mills Estruturas e Serviços de Engenharia boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Mills Estruturas e Serviços de Engenharia made a loss at the EBIT level, last year, it was also good to see that it generated R$57m in EBIT over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Mills Estruturas e Serviços de Engenharia will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Mills Estruturas e Serviços de Engenharia 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. Over the last year, Mills Estruturas e Serviços de Engenharia actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Mills Estruturas e Serviços de Engenharia has net cash of R$190.9m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of R$137m, being 241% of its EBIT. So is Mills Estruturas e Serviços de Engenharia's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Mills Estruturas e Serviços de Engenharia you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.
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