Does Cogna Educação (BVMF:COGN3) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Cogna Educação S.A. (BVMF:COGN3) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Cogna Educação

What Is Cogna Educação's Net Debt?

As you can see below, Cogna Educação had R$6.24b of debt at September 2021, down from R$8.17b a year prior. On the flip side, it has R$3.17b in cash leading to net debt of about R$3.07b.

How Strong Is Cogna Educação's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Cogna Educação had liabilities of R$5.10b due within 12 months and liabilities of R$10.1b due beyond that. Offsetting this, it had R$3.17b in cash and R$2.03b in receivables that were due within 12 months. So its liabilities total R$9.98b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the R$4.23b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Cogna Educação 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 Cogna Educação can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Cogna Educação made a loss at the EBIT level, and saw its revenue drop to R$4.8b, which is a fall of 5.1%. That's not what we would hope to see.

Caveat Emptor

Importantly, Cogna Educação had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost R$256m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of R$2.5b. And until that time we think this is a risky stock. 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. We've identified 1 warning sign with Cogna Educação , and understanding them should be part of your investment process.

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.