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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Cyrela Brazil Realty S.A. Empreendimentos e Participações (BVMF:CYRE3) makes use of debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Cyrela Brazil Realty Empreendimentos e Participações

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

The image below, which you can click on for greater detail, shows that at March 2022 Cyrela Brazil Realty Empreendimentos e Participações had debt of R$3.65b, up from R$2.67b in one year. However, it does have R$2.16b in cash offsetting this, leading to net debt of about R$1.49b.

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$2.55b due within 12 months and liabilities of R$4.68b due beyond that. Offsetting this, it had R$2.16b in cash and R$1.87b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$3.20b.

This deficit is considerable relative to its market capitalization of R$4.83b, so it does suggest shareholders should keep an eye on Cyrela Brazil Realty Empreendimentos e Participações' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). 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).

We'd say that Cyrela Brazil Realty Empreendimentos e Participações's moderate net debt to EBITDA ratio ( being 1.9), indicates prudence when it comes to debt. And its commanding EBIT of 1k times its interest expense, implies the debt load is as light as a peacock feather. It is well worth noting that Cyrela Brazil Realty Empreendimentos e Participações's EBIT shot up like bamboo after rain, gaining 32% in the last twelve months. That'll make it easier to manage its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Cyrela Brazil Realty Empreendimentos e Participações's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Cyrela Brazil Realty Empreendimentos e Participações recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

The good news is that Cyrela Brazil Realty Empreendimentos e Participações's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its level of total liabilities. Taking all this data into account, it seems to us that Cyrela Brazil Realty Empreendimentos e Participações takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Cyrela Brazil Realty Empreendimentos e Participações has 3 warning signs we think you should be aware of.

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.

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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.