Is Construtora Tenda (BVMF:TEND3) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Construtora Tenda

How Much Debt Does Construtora Tenda Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Construtora Tenda had R$1.50b of debt, an increase on R$1.34b, over one year. However, it does have R$480.4m in cash offsetting this, leading to net debt of about R$1.02b.

A Look At Construtora Tenda's Liabilities

We can see from the most recent balance sheet that Construtora Tenda had liabilities of R$1.37b falling due within a year, and liabilities of R$2.06b due beyond that. On the other hand, it had cash of R$480.4m and R$761.1m worth of receivables due within a year. So it has liabilities totalling R$2.19b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the R$483.2m 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 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$2.3b, which is a fall of 15%. We would much prefer see growth.

Caveat Emptor

While Construtora Tenda's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping R$393m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized R$208m 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Construtora Tenda (of which 2 shouldn't be ignored!) 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.