Is Direcional Engenharia (BVMF:DIRR3) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Direcional Engenharia S.A. (BVMF:DIRR3) does use debt in its business. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Direcional Engenharia's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Direcional Engenharia had R$1.61b of debt, an increase on R$1.37b, over one year. But on the other hand it also has R$1.62b in cash, leading to a R$9.94m net cash position.

A Look At Direcional Engenharia's Liabilities

Zooming in on the latest balance sheet data, we can see that Direcional Engenharia had liabilities of R$1.51b due within 12 months and liabilities of R$6.34b due beyond that. Offsetting these obligations, it had cash of R$1.62b as well as receivables valued at R$1.31b due within 12 months. So it has liabilities totalling R$4.92b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of R$6.57b, 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!

Check out our latest analysis for Direcional Engenharia

On top of that, Direcional Engenharia 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 Direcional Engenharia'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 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. Over the last three years, Direcional Engenharia recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While Direcional Engenharia does have more liabilities than liquid assets, it also has net cash of R$9.94m. And it impressed us with its EBIT growth of 59% 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Direcional Engenharia you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.