Does Construtora Tenda (BVMF:TEND3) Have A Healthy Balance Sheet?

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.' 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. We note that Construtora Tenda S.A. (BVMF:TEND3) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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 Construtora Tenda

How Much Debt Does Construtora Tenda Carry?

As you can see below, at the end of June 2022, Construtora Tenda had R$1.49b of debt, up from R$1.13b a year ago. Click the image for more detail. However, it also had R$823.9m in cash, and so its net debt is R$661.9m.

A Look At Construtora Tenda's Liabilities

The latest balance sheet data shows that Construtora Tenda had liabilities of R$1.43b due within a year, and liabilities of R$1.93b falling due after that. Offsetting these obligations, it had cash of R$823.9m as well as receivables valued at R$795.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$1.74b.

The deficiency here weighs heavily on the R$571.8m 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'd watch its balance sheet closely, without a doubt. At the end of the day, Construtora Tenda would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Construtora Tenda can strengthen its balance sheet over time. 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 made a loss at the EBIT level, and saw its revenue drop to R$2.4b, which is a fall of 7.4%. That's not what we would hope to see.

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$242m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it vaporized R$257m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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. Case in point: We've spotted 3 warning signs for Construtora Tenda you should be aware of.

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.