Construtora Tenda (BVMF:TEND3) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Construtora Tenda S.A. (BVMF:TEND3) does carry debt. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Construtora Tenda

What Is Construtora Tenda's Debt?

As you can see below, Construtora Tenda had R$1.36b of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, it also had R$482.5m in cash, and so its net debt is R$875.9m.

A Look At Construtora Tenda's Liabilities

We can see from the most recent balance sheet that Construtora Tenda had liabilities of R$1.59b falling due within a year, and liabilities of R$1.91b due beyond that. Offsetting these obligations, it had cash of R$482.5m as well as receivables valued at R$757.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$2.26b.

This deficit casts a shadow over the R$1.19b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Construtora Tenda would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Construtora Tenda's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Construtora Tenda saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Construtora Tenda had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable R$178m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of R$289m over the last twelve months. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Construtora Tenda is showing 2 warning signs in our investment analysis , 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. 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.