Here's Why CVC Brasil Operadora e Agência de Viagens (BVMF:CVCB3) Can Afford Some Debt

Warren Buffett famously said, '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. 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?

Why Does Debt Bring Risk?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

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

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

You can click the graphic below for the historical numbers, but it shows that CVC Brasil Operadora e Agência de Viagens had R$1.04b of debt in December 2021, down from R$1.62b, one year before. However, it also had R$986.6m in cash, and so its net debt is R$53.2m.

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

According to the last reported balance sheet, CVC Brasil Operadora e Agência de Viagens had liabilities of R$3.36b due within 12 months, and liabilities of R$1.22b due beyond 12 months. Offsetting these obligations, it had cash of R$986.6m as well as receivables valued at R$1.24b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$2.35b.

This is a mountain of leverage relative to its market capitalization of R$3.36b. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 32%, to R$826m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though CVC Brasil Operadora e Agência de Viagens managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Its EBIT loss was a whopping R$444m. 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. However, it doesn't help that it burned through R$238m of cash over the last year. 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. For instance, we've identified 2 warning signs for CVC Brasil Operadora e Agência de Viagens that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.