Is Plano & Plano Desenvolvimento Imobiliário (BVMF:PLPL3) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Plano & Plano Desenvolvimento Imobiliário S.A. (BVMF:PLPL3) does have debt on its balance sheet. 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 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Plano & Plano Desenvolvimento Imobiliário

What Is Plano & Plano Desenvolvimento Imobiliário's Debt?

The chart below, which you can click on for greater detail, shows that Plano & Plano Desenvolvimento Imobiliário had R$473.2m in debt in September 2023; about the same as the year before. However, it does have R$201.1m in cash offsetting this, leading to net debt of about R$272.1m.

How Healthy Is Plano & Plano Desenvolvimento Imobiliário's Balance Sheet?

The latest balance sheet data shows that Plano & Plano Desenvolvimento Imobiliário had liabilities of R$573.4m due within a year, and liabilities of R$770.6m falling due after that. Offsetting this, it had R$201.1m in cash and R$454.7m in receivables that were due within 12 months. So its liabilities total R$688.3m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Plano & Plano Desenvolvimento Imobiliário is worth R$2.67b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Plano & Plano Desenvolvimento Imobiliário has a low net debt to EBITDA ratio of only 0.88. And its EBIT covers its interest expense a whopping 136 times over. So we're pretty relaxed about its super-conservative use of debt. Even more impressive was the fact that Plano & Plano Desenvolvimento Imobiliário grew its EBIT by 127% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Plano & Plano Desenvolvimento Imobiliário'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Plano & Plano Desenvolvimento Imobiliário recorded free cash flow of 41% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, Plano & Plano Desenvolvimento Imobiliário's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its EBIT growth rate also supports that impression! When we consider the range of factors above, it looks like Plano & Plano Desenvolvimento Imobiliário is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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. We've identified 2 warning signs with Plano & Plano Desenvolvimento Imobiliário , and understanding them should be part of your investment process.

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.