Viver Incorporadora e Construtora (BVMF:VIVR3) 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.' 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. We can see that Viver Incorporadora e Construtora S.A. (BVMF:VIVR3) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Viver Incorporadora e Construtora

What Is Viver Incorporadora e Construtora's Net Debt?

The image below, which you can click on for greater detail, shows that Viver Incorporadora e Construtora had debt of R$42.1m at the end of June 2023, a reduction from R$248.1m over a year. However, because it has a cash reserve of R$30.6m, its net debt is less, at about R$11.5m.

How Strong Is Viver Incorporadora e Construtora's Balance Sheet?

We can see from the most recent balance sheet that Viver Incorporadora e Construtora had liabilities of R$150.8m falling due within a year, and liabilities of R$156.1m due beyond that. Offsetting this, it had R$30.6m in cash and R$57.0m in receivables that were due within 12 months. So its liabilities total R$219.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the R$77.5m 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 definitely think shareholders need to watch this one closely. At the end of the day, Viver Incorporadora e Construtora would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Viver Incorporadora e Construtora's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Viver Incorporadora e Construtora wasn't profitable at an EBIT level, but managed to grow its revenue by 70%, to R$112m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Viver Incorporadora e Construtora managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable R$31m 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. 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$31m 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. 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 Viver Incorporadora e Construtora is showing 4 warning signs in our investment analysis , and 3 of those shouldn't be ignored...

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.