CVC Brasil Operadora e Agência de Viagens (BVMF:CVCB3) Has A Somewhat Strained Balance Sheet

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, CVC Brasil Operadora e Agência de Viagens S.A. (BVMF:CVCB3) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CVC Brasil Operadora e Agência de Viagens

What Is CVC Brasil Operadora e Agência de Viagens's Debt?

You can click the graphic below for the historical numbers, but it shows that CVC Brasil Operadora e Agência de Viagens had R$1.30b of debt in June 2021, down from R$2.16b, one year before. However, it also had R$655.2m in cash, and so its net debt is R$646.6m.

How Healthy Is CVC Brasil Operadora e Agência de Viagens' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CVC Brasil Operadora e Agência de Viagens had liabilities of R$3.05b due within 12 months and liabilities of R$1.51b due beyond that. Offsetting these obligations, it had cash of R$655.2m as well as receivables valued at R$1.36b due within 12 months. So it has liabilities totalling R$2.55b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of R$3.73b, so it does suggest shareholders should keep an eye on CVC Brasil Operadora e Agência de Viagens' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

CVC Brasil Operadora e Agência de Viagens shareholders face the double whammy of a high net debt to EBITDA ratio (7.7), and fairly weak interest coverage, since EBIT is just 0.11 times the interest expense. The debt burden here is substantial. One redeeming factor for CVC Brasil Operadora e Agência de Viagens is that it turned last year's EBIT loss into a gain of R$8.8m, over the last twelve months. 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 CVC Brasil Operadora e Agência de Viagens 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, CVC Brasil Operadora e Agência de Viagens saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both CVC Brasil Operadora e Agência de Viagens's interest cover and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. Having said that, its ability to grow its EBIT isn't such a worry. We're quite clear that we consider CVC Brasil Operadora e Agência de Viagens to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. 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. For example - CVC Brasil Operadora e Agência de Viagens has 2 warning signs we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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