Cyrela Brazil Realty Empreendimentos e Participações (BVMF:CYRE3) Has A Pretty Healthy Balance Sheet

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 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. As with many other companies Cyrela Brazil Realty S.A. Empreendimentos e Participações (BVMF:CYRE3) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Cyrela Brazil Realty Empreendimentos e Participações

How Much Debt Does Cyrela Brazil Realty Empreendimentos e Participações Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Cyrela Brazil Realty Empreendimentos e Participações had R$3.40b of debt, an increase on R$2.43b, over one year. However, it does have R$2.21b in cash offsetting this, leading to net debt of about R$1.19b.

A Look At Cyrela Brazil Realty Empreendimentos e Participações' Liabilities

Zooming in on the latest balance sheet data, we can see that Cyrela Brazil Realty Empreendimentos e Participações had liabilities of R$2.13b due within 12 months and liabilities of R$4.42b due beyond that. Offsetting this, it had R$2.21b in cash and R$1.68b in receivables that were due within 12 months. So it has liabilities totalling R$2.67b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Cyrela Brazil Realty Empreendimentos e Participações is worth R$5.81b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Cyrela Brazil Realty Empreendimentos e Participações's net debt to EBITDA ratio of about 1.6 suggests only moderate use of debt. And its strong interest cover of 1k times, makes us even more comfortable. On top of that, Cyrela Brazil Realty Empreendimentos e Participações grew its EBIT by 50% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Cyrela Brazil Realty Empreendimentos e Participações can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, Cyrela Brazil Realty Empreendimentos e Participações actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Happily, Cyrela Brazil Realty Empreendimentos e Participações's impressive interest cover implies it has the upper hand on its debt. But truth be told we feel its level of total liabilities does undermine this impression a bit. Zooming out, Cyrela Brazil Realty Empreendimentos e Participações seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Cyrela Brazil Realty Empreendimentos e Participações is showing 4 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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