RNI Negócios Imobiliários (BVMF:RDNI3) Has No Shortage Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, RNI Negócios Imobiliários S.A. (BVMF:RDNI3) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 RNI Negócios Imobiliários

How Much Debt Does RNI Negócios Imobiliários Carry?

The image below, which you can click on for greater detail, shows that at December 2020 RNI Negócios Imobiliários had debt of R$434.1m, up from R$413.9m in one year. However, because it has a cash reserve of R$73.3m, its net debt is less, at about R$360.8m.

How Strong Is RNI Negócios Imobiliários' Balance Sheet?

The latest balance sheet data shows that RNI Negócios Imobiliários had liabilities of R$302.1m due within a year, and liabilities of R$652.3m falling due after that. On the other hand, it had cash of R$73.3m and R$313.5m worth of receivables due within a year. So its liabilities total R$567.6m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's R$452.8m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive 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).

RNI Negócios Imobiliários shareholders face the double whammy of a high net debt to EBITDA ratio (90.4), and fairly weak interest coverage, since EBIT is just 0.14 times the interest expense. This means we'd consider it to have a heavy debt load. Even worse, RNI Negócios Imobiliários saw its EBIT tank 73% over the last 12 months. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since RNI Negócios Imobiliários will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last two years, RNI Negócios Imobiliários burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both RNI Negócios Imobiliários's conversion of EBIT to free cash flow and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. And furthermore, its net debt to EBITDA also fails to instill confidence. Considering all the factors previously mentioned, we think that RNI Negócios Imobiliários really is carrying too much debt. To our minds, that means the stock is rather high risk, and probably one to avoid; but to each their own (investing) style. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for RNI Negócios Imobiliários (of which 1 is significant!) you should know about.

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. 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.
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