CVC Brasil Operadora e Agência de Viagens (BVMF:CVCB3) Is Carrying A Fair Bit Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 CVC Brasil Operadora e Agência de Viagens S.A. (BVMF:CVCB3) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

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

How Much Debt Does CVC Brasil Operadora e Agência de Viagens Carry?

You can click the graphic below for the historical numbers, but it shows that CVC Brasil Operadora e Agência de Viagens had R$1.69b of debt in December 2020, down from R$2.11b, one year before. However, because it has a cash reserve of R$947.8m, its net debt is less, at about R$741.4m.

A Look At CVC Brasil Operadora e Agência de Viagens' Liabilities

Zooming in on the latest balance sheet data, we can see that CVC Brasil Operadora e Agência de Viagens had liabilities of R$3.22b due within 12 months and liabilities of R$1.82b due beyond that. Offsetting these obligations, it had cash of R$947.8m as well as receivables valued at R$1.32b due within 12 months. So it has liabilities totalling R$2.78b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of R$3.43b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year CVC Brasil Operadora e Agência de Viagens had a loss before interest and tax, and actually shrunk its revenue by 63%, to R$625m. That makes us nervous, to say the least.

Caveat Emptor

While CVC Brasil Operadora e Agência de Viagens's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable R$762m at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of R$1.2b. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that CVC Brasil Operadora e Agência de Viagens is showing 3 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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