Health Check: How Prudently Does Gafisa (BVMF:GFSA3) Use Debt?

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. As with many other companies Gafisa S.A. (BVMF:GFSA3) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Gafisa

What Is Gafisa's Debt?

You can click the graphic below for the historical numbers, but it shows that Gafisa had R$1.69b of debt in June 2024, down from R$1.96b, one year before. However, because it has a cash reserve of R$103.7m, its net debt is less, at about R$1.58b.

How Healthy Is Gafisa's Balance Sheet?

According to the last reported balance sheet, Gafisa had liabilities of R$1.92b due within 12 months, and liabilities of R$1.14b due beyond 12 months. Offsetting this, it had R$103.7m in cash and R$827.3m in receivables that were due within 12 months. So its liabilities total R$2.13b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the R$188.7m company, like a colossus towering over mere mortals. 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 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 24%, to R$959m. That makes us nervous, to say the least.

Caveat Emptor

While Gafisa's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping R$34m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost R$44m in the last year. So we think buying this stock is risky. 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. To that end, you should be aware of the 3 warning signs we've spotted with Gafisa .

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.