Is Construtora Tenda (BVMF:TEND3) Using Too Much Debt?

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.' 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 Construtora Tenda S.A. (BVMF:TEND3) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Construtora Tenda

How Much Debt Does Construtora Tenda Carry?

The image below, which you can click on for greater detail, shows that Construtora Tenda had debt of R$1.37b at the end of June 2023, a reduction from R$1.48b over a year. On the flip side, it has R$525.1m in cash leading to net debt of about R$843.0m.

How Healthy Is Construtora Tenda's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Construtora Tenda had liabilities of R$1.60b due within 12 months and liabilities of R$2.02b due beyond that. Offsetting this, it had R$525.1m in cash and R$766.0m in receivables that were due within 12 months. So its liabilities total R$2.32b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the R$1.11b 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Construtora Tenda wasn't profitable at an EBIT level, but managed to grow its revenue by 4.9%, to R$2.6b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Construtora Tenda produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at R$92m. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of R$361m over the last twelve months. That means it's on the risky side of things. 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. Be aware that Construtora Tenda is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.