Is Cogna Educação (BVMF:COGN3) Using Debt Sensibly?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Cogna Educação S.A. (BVMF:COGN3) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Cogna Educação

How Much Debt Does Cogna Educação Carry?

The image below, which you can click on for greater detail, shows that Cogna Educação had debt of R$6.24b at the end of September 2021, a reduction from R$8.17b over a year. However, because it has a cash reserve of R$3.17b, its net debt is less, at about R$3.07b.

A Look At Cogna Educação's Liabilities

According to the last reported balance sheet, Cogna Educação had liabilities of R$5.10b due within 12 months, and liabilities of R$10.1b due beyond 12 months. 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$4.70b 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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

Over the last twelve months Cogna Educação produced an earnings before interest and tax (EBIT) loss. Indeed, it lost R$256m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of R$2.5b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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 2 warning signs with Cogna Educação (at least 1 which is concerning) , 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.

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.

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