Does Direcional Engenharia (BVMF:DIRR3) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Direcional Engenharia S.A. (BVMF:DIRR3) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Direcional Engenharia

What Is Direcional Engenharia's Debt?

As you can see below, Direcional Engenharia had R$1.39b of debt at June 2024, down from R$1.46b a year prior. But it also has R$1.42b in cash to offset that, meaning it has R$35.4m net cash.

How Healthy Is Direcional Engenharia's Balance Sheet?

According to the last reported balance sheet, Direcional Engenharia had liabilities of R$1.14b due within 12 months, and liabilities of R$5.23b due beyond 12 months. Offsetting this, it had R$1.42b in cash and R$1.15b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$3.79b.

This deficit is considerable relative to its market capitalization of R$5.80b, so it does suggest shareholders should keep an eye on Direcional Engenharia's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Direcional Engenharia boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Direcional Engenharia grew its EBIT by 13% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Direcional Engenharia's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Direcional 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. Considering the last three years, Direcional Engenharia actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing Up

Although Direcional Engenharia's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of R$35.4m. And it also grew its EBIT by 13% over the last year. So we are not troubled with Direcional Engenharia's debt use. 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. We've identified 2 warning signs with Direcional Engenharia (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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.