Does EZTEC Empreendimentos e Participações (BVMF:EZTC3) Have A 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.' 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. We note that EZTEC Empreendimentos e Participações S.A. (BVMF:EZTC3) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 EZTEC Empreendimentos e Participações

What Is EZTEC Empreendimentos e Participações's Debt?

The image below, which you can click on for greater detail, shows that at June 2021 EZTEC Empreendimentos e Participações had debt of R$11.6m, up from R$4.29m in one year. But on the other hand it also has R$1.06b in cash, leading to a R$1.05b net cash position.

How Strong Is EZTEC Empreendimentos e Participações' Balance Sheet?

We can see from the most recent balance sheet that EZTEC Empreendimentos e Participações had liabilities of R$315.2m falling due within a year, and liabilities of R$218.1m due beyond that. Offsetting these obligations, it had cash of R$1.06b as well as receivables valued at R$334.9m due within 12 months. So it can boast R$862.2m more liquid assets than total liabilities.

This excess liquidity suggests that EZTEC Empreendimentos e Participações is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that EZTEC Empreendimentos e Participações has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that EZTEC Empreendimentos e Participações has been able to increase its EBIT by 25% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if EZTEC 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While EZTEC Empreendimentos e Participações has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, EZTEC Empreendimentos e Participações's free cash flow amounted to 25% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to investigate a company's debt, in this case EZTEC Empreendimentos e Participações has R$1.05b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 25% over the last year. So is EZTEC Empreendimentos e Participações's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for EZTEC Empreendimentos e Participações you should know about.

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.

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.

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