Cogna Educação (BVMF:COGN3) Is Making Moderate Use Of 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.' 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 Cogna Educação S.A. (BVMF:COGN3) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Cogna Educação

What Is Cogna Educação's Debt?

As you can see below, Cogna Educação had R$7.22b of debt at December 2020, down from R$8.08b a year prior. However, it does have R$4.18b in cash offsetting this, leading to net debt of about R$3.04b.

How Strong Is Cogna Educação's Balance Sheet?

According to the last reported balance sheet, Cogna Educação had liabilities of R$5.26b due within 12 months, and liabilities of R$11.2b due beyond 12 months. Offsetting these obligations, it had cash of R$4.18b as well as receivables valued at R$2.26b due within 12 months. So its liabilities total R$10.1b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of R$12.4b, so it does suggest shareholders should keep an eye on Cogna Educação's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Cogna Educação'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 Cogna Educação had a loss before interest and tax, and actually shrunk its revenue by 17%, to R$5.3b. That's not what we would hope to see.

Caveat Emptor

Not only did Cogna Educação's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at R$1.0b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through R$188m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Cogna Educação is showing 1 warning sign in our investment analysis , you should know about...

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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