EZTEC Empreendimentos e Participações (BVMF:EZTC3) Has A Somewhat Strained Balance Sheet

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies EZTEC Empreendimentos e Participações S.A. (BVMF:EZTC3) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for EZTEC Empreendimentos e Participações

What Is EZTEC Empreendimentos e Participações's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 EZTEC Empreendimentos e Participações had R$684.2m of debt, an increase on R$395.5m, over one year. However, it does have R$781.4m in cash offsetting this, leading to net cash of R$97.2m.

A Look At EZTEC Empreendimentos e Participações' Liabilities

Zooming in on the latest balance sheet data, we can see that EZTEC Empreendimentos e Participações had liabilities of R$453.5m due within 12 months and liabilities of R$611.3m due beyond that. Offsetting these obligations, it had cash of R$781.4m as well as receivables valued at R$316.4m due within 12 months. So it can boast R$33.0m more liquid assets than total liabilities.

This state of affairs indicates that EZTEC Empreendimentos e Participações' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the R$3.10b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, EZTEC Empreendimentos e Participações boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that EZTEC Empreendimentos e Participações's load is not too heavy, because its EBIT was down 55% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine EZTEC 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. EZTEC Empreendimentos e Participações 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, EZTEC Empreendimentos e Participações saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case EZTEC Empreendimentos e Participações has R$97.2m in net cash and a decent-looking balance sheet. So while EZTEC Empreendimentos e Participações does not have a great balance sheet, it's certainly not too bad. 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. Case in point: We've spotted 2 warning signs for EZTEC Empreendimentos e Participações you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.