We Think Mills Estruturas e Serviços de Engenharia (BVMF:MILS3) Can Stay On Top Of Its Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Mills Estruturas e Serviços de Engenharia S.A. (BVMF:MILS3) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. 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

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

The image below, which you can click on for greater detail, shows that at December 2020 Mills Estruturas e Serviços de Engenharia had debt of R$207.7m, up from R$91.6m in one year. However, it does have R$378.9m in cash offsetting this, leading to net cash of R$171.2m.

A Look At Mills Estruturas e Serviços de Engenharia's Liabilities

According to the last reported balance sheet, Mills Estruturas e Serviços de Engenharia had liabilities of R$143.7m due within 12 months, and liabilities of R$233.8m due beyond 12 months. Offsetting this, it had R$378.9m in cash and R$105.8m in receivables that were due within 12 months. So it can boast R$107.2m more liquid assets than total liabilities.

This surplus suggests that Mills Estruturas e Serviços de Engenharia has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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$39m in EBIT over the last twelve months. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 year, Mills Estruturas e Serviços de Engenharia actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Mills Estruturas e Serviços de Engenharia has R$171.2m in net cash and a decent-looking balance sheet. The cherry on top was that in converted 358% of that EBIT to free cash flow, bringing in R$140m. 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 1 warning sign for Mills Estruturas e Serviços de Engenharia you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

When trading Mills Estruturas e Serviços de Engenharia or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.