Here's Why EZTEC Empreendimentos e Participações (BVMF:EZTC3) Can Manage Its Debt Responsibly

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.' 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. As with many other companies EZTEC Empreendimentos e Participações S.A. (BVMF:EZTC3) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for EZTEC Empreendimentos e Participações

What Is EZTEC Empreendimentos e Participações's Net Debt?

As you can see below, at the end of March 2021, EZTEC Empreendimentos e Participações had R$8.24m of debt, up from R$557.0k a year ago. Click the image for more detail. But on the other hand it also has R$1.07b in cash, leading to a R$1.06b net cash position.

How Strong Is EZTEC Empreendimentos e Participações' Balance Sheet?

According to the last reported balance sheet, EZTEC Empreendimentos e Participações had liabilities of R$363.3m due within 12 months, and liabilities of R$224.4m due beyond 12 months. Offsetting this, it had R$1.07b in cash and R$314.0m in receivables that were due within 12 months. So it actually has R$794.9m more liquid assets than total liabilities.

This short term liquidity is a sign that EZTEC Empreendimentos e Participações could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, EZTEC Empreendimentos e Participações boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that EZTEC Empreendimentos e Participações grew its EBIT at 13% over the last year, further increasing its ability to manage 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept 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. In the last three years, EZTEC Empreendimentos e Participações's free cash flow amounted to 23% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that EZTEC Empreendimentos e Participações has net cash of R$1.06b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 13% in the last twelve months. So we are not troubled with EZTEC Empreendimentos e Participações's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in EZTEC Empreendimentos e Participações, you may well want to click here to check an interactive graph of its earnings per share history.

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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