Is CVC Brasil Operadora e Agência de Viagens (BVMF:CVCB3) Using Too Much Debt?

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 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. As with many other companies CVC Brasil Operadora e Agência de Viagens S.A. (BVMF:CVCB3) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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?

As you can see below, CVC Brasil Operadora e Agência de Viagens had R$963.3m of debt at March 2023, down from R$1.01b a year prior. On the flip side, it has R$426.2m in cash leading to net debt of about R$537.1m.

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$3.09b due within 12 months and liabilities of R$455.3m due beyond that. Offsetting these obligations, it had cash of R$426.2m as well as receivables valued at R$740.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$2.38b.

This deficit casts a shadow over the R$845.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, CVC Brasil Operadora e Agência de Viagens would probably need a major re-capitalization if its creditors were to demand repayment. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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 28%, to R$1.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, CVC Brasil Operadora e Agência de Viagens still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at R$57m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through R$397m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for CVC Brasil Operadora e Agência de Viagens you should be aware of, and 1 of them is a bit concerning.

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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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.