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

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.' 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. 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?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for EZTEC Empreendimentos e Participações

How Much Debt Does EZTEC Empreendimentos e Participações Carry?

The image below, which you can click on for greater detail, shows that at March 2023 EZTEC Empreendimentos e Participações had debt of R$609.9m, up from R$39.0m in one year. However, it does have R$789.4m in cash offsetting this, leading to net cash of R$179.5m.

How Healthy Is EZTEC Empreendimentos e Participações' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that EZTEC Empreendimentos e Participações had liabilities of R$454.6m due within 12 months and liabilities of R$579.0m due beyond that. Offsetting these obligations, it had cash of R$789.4m as well as receivables valued at R$339.1m due within 12 months. So it can boast R$95.0m 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!

In fact EZTEC Empreendimentos e Participações's saving grace is its low debt levels, because its EBIT has tanked 58% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, EZTEC Empreendimentos e Participações burned a lot of cash. 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$179.5m, as well as more liquid assets than liabilities. 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that EZTEC Empreendimentos e Participações is showing 1 warning sign in our investment analysis , you should know about...

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.