These 4 Measures Indicate That Mills Estruturas e Serviços de Engenharia (BVMF:MILS3) 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 note that Mills Estruturas e Serviços de Engenharia S.A. (BVMF:MILS3) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Mills Estruturas e Serviços de Engenharia

How Much Debt Does Mills Estruturas e Serviços de Engenharia Carry?

As you can see below, at the end of September 2021, Mills Estruturas e Serviços de Engenharia had R$165.0m of debt, up from R$125.8m a year ago. Click the image for more detail. However, its balance sheet shows it holds R$320.4m in cash, so it actually has R$155.4m net cash.

How Healthy 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$170.1m due within a year, and liabilities of R$192.2m falling due after that. Offsetting this, it had R$320.4m in cash and R$139.7m in receivables that were due within 12 months. So it can boast R$97.6m 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!

Even more impressive was the fact that Mills Estruturas e Serviços de Engenharia grew its EBIT by 293% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is Mills Estruturas e Serviços de Engenharia's earnings that will influence how the balance sheet holds up in the future. 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. Mills Estruturas e Serviços de Engenharia may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Mills Estruturas e Serviços de Engenharia actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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$155.4m, as well as more liquid assets than liabilities. The cherry on top was that in converted 171% of that EBIT to free cash flow, bringing in R$126m. So we don't think Mills Estruturas e Serviços de Engenharia's use of debt is risky. 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. For example, we've discovered 1 warning sign for Mills Estruturas e Serviços de Engenharia that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.