We Think Cyrela Brazil Realty Empreendimentos e Participações (BVMF:CYRE3) Is Taking Some Risk With Its 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 note that Cyrela Brazil Realty S.A. Empreendimentos e Participações (BVMF:CYRE3) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 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

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

As you can see below, at the end of September 2023, Cyrela Brazil Realty Empreendimentos e Participações had R$4.92b of debt, up from R$4.34b a year ago. Click the image for more detail. On the flip side, it has R$2.65b in cash leading to net debt of about R$2.27b.

How Healthy Is Cyrela Brazil Realty Empreendimentos e Participações' Balance Sheet?

According to the last reported balance sheet, Cyrela Brazil Realty Empreendimentos e Participações had liabilities of R$3.00b due within 12 months, and liabilities of R$5.48b due beyond 12 months. Offsetting these obligations, it had cash of R$2.65b as well as receivables valued at R$2.61b due within 12 months. So its liabilities total R$3.22b more than the combination of its cash and short-term receivables.

Cyrela Brazil Realty Empreendimentos e Participações has a market capitalization of R$9.40b, so it could very likely raise cash to ameliorate 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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Cyrela Brazil Realty Empreendimentos e Participações has a debt to EBITDA ratio of 3.1, which signals significant debt, but is still pretty reasonable for most types of business. However, its interest coverage of 1k is very high, suggesting that the interest expense on the debt is currently quite low. Cyrela Brazil Realty Empreendimentos e Participações grew its EBIT by 3.7% in the last year. That's far from incredible but it is a good thing, when it comes to paying off debt. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Cyrela Brazil Realty Empreendimentos e Participações burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Cyrela Brazil Realty Empreendimentos e Participações's conversion of EBIT to free cash flow and net debt to EBITDA definitely weigh on it, in our esteem. But the good news is it seems to be able to cover its interest expense with its EBIT with ease. Taking the abovementioned factors together we do think Cyrela Brazil Realty Empreendimentos e Participações's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Cyrela Brazil Realty Empreendimentos e Participações's earnings per share history for free.

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.

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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.