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

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.' 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. As with many other companies CVC Brasil Operadora e Agência de Viagens S.A. (BVMF:CVCB3) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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.

See our latest analysis for CVC Brasil Operadora e Agência de Viagens

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

The image below, which you can click on for greater detail, shows that CVC Brasil Operadora e Agência de Viagens had debt of R$1.31b at the end of March 2021, a reduction from R$2.18b over a year. On the flip side, it has R$748.9m in cash leading to net debt of about R$563.2m.

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

The latest balance sheet data shows that CVC Brasil Operadora e Agência de Viagens had liabilities of R$2.71b due within a year, and liabilities of R$1.77b falling due after that. Offsetting this, it had R$748.9m in cash and R$1.23b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$2.49b.

This is a mountain of leverage relative to its market capitalization of R$3.78b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine CVC Brasil Operadora e Agência de Viagens's ability to maintain a healthy balance sheet going forward. 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, CVC Brasil Operadora e Agência de Viagens made a loss at the EBIT level, and saw its revenue drop to R$394m, which is a fall of 76%. 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$709m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of R$138m. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that CVC Brasil Operadora e Agência de Viagens is showing 2 warning signs in our investment analysis , you should know about...

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.

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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.
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