Is EZTEC Empreendimentos e Participações (BVMF:EZTC3) Using Too Much Debt?

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.' 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. We can see that EZTEC Empreendimentos e Participações S.A. (BVMF:EZTC3) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for EZTEC Empreendimentos e Participações

How Much Debt Does EZTEC Empreendimentos e Participações Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 EZTEC Empreendimentos e Participações had R$528.4m of debt, an increase on R$30.1m, over one year. However, it does have R$768.7m in cash offsetting this, leading to net cash of R$240.3m.

A Look At EZTEC Empreendimentos e Participações' Liabilities

We can see from the most recent balance sheet that EZTEC Empreendimentos e Participações had liabilities of R$475.7m falling due within a year, and liabilities of R$519.0m due beyond that. Offsetting these obligations, it had cash of R$768.7m as well as receivables valued at R$359.4m due within 12 months. So it actually has R$133.4m more liquid assets than total liabilities.

This surplus suggests that EZTEC Empreendimentos e Participações has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

The modesty of its debt load may become crucial for EZTEC Empreendimentos e Participações if management cannot prevent a repeat of the 35% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, EZTEC Empreendimentos e Participações saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

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$240.3m, as well as more liquid assets than liabilities. So although we see some areas for improvement, we're not too worried about EZTEC Empreendimentos e Participações's balance sheet. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for EZTEC Empreendimentos e Participações you should be aware of.

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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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.