These 4 Measures Indicate That EZTEC Empreendimentos e Participações (BVMF:EZTC3) Is Using Debt Reasonably Well

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that EZTEC Empreendimentos e Participações S.A. (BVMF:EZTC3) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See 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 2024 EZTEC Empreendimentos e Participações had debt of R$1.07b, up from R$857.0m in one year. On the flip side, it has R$892.8m in cash leading to net debt of about R$181.4m.

How Strong Is EZTEC Empreendimentos e Participações' Balance Sheet?

According to the last reported balance sheet, EZTEC Empreendimentos e Participações had liabilities of R$244.8m due within 12 months, and liabilities of R$1.14b due beyond 12 months. Offsetting these obligations, it had cash of R$892.8m as well as receivables valued at R$438.3m due within 12 months. So its liabilities total R$56.8m more than the combination of its cash and short-term receivables.

Of course, EZTEC Empreendimentos e Participações has a market capitalization of R$2.78b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

EZTEC Empreendimentos e Participações has a low debt to EBITDA ratio of only 0.75. And remarkably, despite having net debt, it actually received more in interest over the last twelve months than it had to pay. So there's no doubt this company can take on debt while staying cool as a cucumber. Even more impressive was the fact that EZTEC Empreendimentos e Participações grew its EBIT by 305% over twelve months. That boost will make it even easier to pay down debt going forward. 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. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, EZTEC Empreendimentos e Participações burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Happily, EZTEC Empreendimentos e Participações's impressive interest cover implies it has the upper hand on its debt. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. Looking at all the aforementioned factors together, it strikes us that EZTEC Empreendimentos e Participações can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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.

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.