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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that EZTEC Empreendimentos e Participações S.A. (BVMF:EZTC3) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 EZTEC Empreendimentos e Participações had debt of R$19.2m, up from R$4.58m in one year. However, its balance sheet shows it holds R$1.03b in cash, so it actually has R$1.01b net cash.

How Healthy Is EZTEC Empreendimentos e Participações' Balance Sheet?

The latest balance sheet data shows that EZTEC Empreendimentos e Participações had liabilities of R$343.3m due within a year, and liabilities of R$248.9m falling due after that. Offsetting these obligations, it had cash of R$1.03b as well as receivables valued at R$313.5m due within 12 months. So it actually has R$751.5m more liquid assets than total liabilities.

This surplus suggests that EZTEC Empreendimentos e Participações is using debt in a way that is appears to be both safe and conservative. 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.

Also good is that EZTEC Empreendimentos e Participações grew its EBIT at 17% 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Looking at the most recent three years, EZTEC Empreendimentos e Participações recorded free cash flow of 26% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

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$1.01b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 17% 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. We've identified 1 warning sign with EZTEC Empreendimentos e Participações , and understanding them should be part of your investment process.

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.