Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Gafisa S.A. (BVMF:GFSA3) does carry debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Gafisa
How Much Debt Does Gafisa Carry?
As you can see below, Gafisa had R$772.1m of debt at September 2020, down from R$814.8m a year prior. However, it also had R$601.6m in cash, and so its net debt is R$170.5m.
How Healthy Is Gafisa's Balance Sheet?
We can see from the most recent balance sheet that Gafisa had liabilities of R$1.44b falling due within a year, and liabilities of R$491.6m due beyond that. On the other hand, it had cash of R$601.6m and R$546.5m worth of receivables due within a year. So it has liabilities totalling R$783.8m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Gafisa is worth R$1.31b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Gafisa's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Gafisa had a loss before interest and tax, and actually shrunk its revenue by 14%, to R$420m. We would much prefer see growth.
Caveat Emptor
Not only did Gafisa's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at R$26m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through R$246m of cash over the last year. So suffice it to say we consider the stock very risky. 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. Case in point: We've spotted 1 warning sign for Gafisa you should be aware of.
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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About BOVESPA:GFSA3
Gafisa
Operates as a development and construction company under the Gafisa brand name in Brazil.
Excellent balance sheet and good value.
