Is Cyrela Brazil Realty Empreendimentos e Participações (BVMF:CYRE3) Using Too Much Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Cyrela Brazil Realty S.A. Empreendimentos e Participações (BVMF:CYRE3) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Cyrela Brazil Realty Empreendimentos e Participações

What Is Cyrela Brazil Realty Empreendimentos e Participações's Net Debt?

The chart below, which you can click on for greater detail, shows that Cyrela Brazil Realty Empreendimentos e Participações had R$2.42b in debt in September 2020; about the same as the year before. On the flip side, it has R$1.88b in cash leading to net debt of about R$537.6m.

A Look At Cyrela Brazil Realty Empreendimentos e Participações' Liabilities

The latest balance sheet data shows that Cyrela Brazil Realty Empreendimentos e Participações had liabilities of R$1.78b due within a year, and liabilities of R$3.06b falling due after that. Offsetting these obligations, it had cash of R$1.88b as well as receivables valued at R$1.36b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$1.60b.

Given Cyrela Brazil Realty Empreendimentos e Participações has a market capitalization of R$10.4b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

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).

Cyrela Brazil Realty Empreendimentos e Participações has net debt of just 0.96 times EBITDA, suggesting it could ramp leverage without breaking a sweat. But the really cool thing is that it actually managed to receive more interest than it paid, over the last year. So there's no doubt this company can take on debt while staying cool as a cucumber. On top of that, Cyrela Brazil Realty Empreendimentos e Participações grew its EBIT by 59% 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 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, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last two years, Cyrela Brazil Realty Empreendimentos e Participações actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Happily, Cyrela Brazil Realty Empreendimentos e Participações's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Overall, we don't think Cyrela Brazil Realty Empreendimentos e Participações is taking any bad risks, as its debt load seems modest. So we're not worried about the use of a little leverage on the balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Cyrela Brazil Realty Empreendimentos e Participações that you should be aware of before investing here.

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. 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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