Is MRV Engenharia e Participações (BVMF:MRVE3) Using Debt In A Risky Way?

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, MRV Engenharia e Participações S.A. (BVMF:MRVE3) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for MRV Engenharia e Participações

How Much Debt Does MRV Engenharia e Participações Carry?

As you can see below, at the end of March 2023, MRV Engenharia e Participações had R$7.88b of debt, up from R$6.31b a year ago. Click the image for more detail. However, it does have R$2.19b in cash offsetting this, leading to net debt of about R$5.69b.

A Look At MRV Engenharia e Participações' Liabilities

Zooming in on the latest balance sheet data, we can see that MRV Engenharia e Participações had liabilities of R$5.92b due within 12 months and liabilities of R$10.1b due beyond that. Offsetting this, it had R$2.19b in cash and R$2.78b in receivables that were due within 12 months. So its liabilities total R$11.1b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the R$5.60b 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, MRV Engenharia e Participações would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine MRV Engenharia e Participações'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 MRV Engenharia e Participações had a loss before interest and tax, and actually shrunk its revenue by 7.6%, to R$6.6b. We would much prefer see growth.

Caveat Emptor

Importantly, MRV Engenharia e Participações had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost R$159m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through R$1.8b in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with MRV Engenharia e Participações (including 1 which doesn't sit too well with us) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.