Does Gafisa (BVMF:GFSA3) Have A Healthy Balance Sheet?

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. Importantly, Gafisa S.A. (BVMF:GFSA3) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Gafisa

How Much Debt Does Gafisa Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Gafisa had R$1.91b of debt, an increase on R$1.64b, over one year. However, because it has a cash reserve of R$241.7m, its net debt is less, at about R$1.67b.

How Strong Is Gafisa's Balance Sheet?

We can see from the most recent balance sheet that Gafisa had liabilities of R$1.80b falling due within a year, and liabilities of R$1.79b due beyond that. On the other hand, it had cash of R$241.7m and R$936.1m worth of receivables due within a year. So it has liabilities totalling R$2.41b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the R$434.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Gafisa would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Gafisa's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Gafisa wasn't profitable at an EBIT level, but managed to grow its revenue by 46%, to R$1.2b. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Gafisa still had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping R$97m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through R$213m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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. For example Gafisa has 3 warning signs (and 1 which is concerning) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.