We Think CVC Brasil Operadora e Agência de Viagens (BVMF:CVCB3) Is Taking Some Risk With Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View 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 at September 2024 CVC Brasil Operadora e Agência de Viagens had debt of R$815.2m, up from R$776.5m in one year. However, it does have R$383.4m in cash offsetting this, leading to net debt of about R$431.7m.

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

We can see from the most recent balance sheet that CVC Brasil Operadora e Agência de Viagens had liabilities of R$2.52b falling due within a year, and liabilities of R$840.6m due beyond that. Offsetting this, it had R$383.4m in cash and R$1.26b in receivables that were due within 12 months. So its liabilities total R$1.72b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of R$1.15b, we think shareholders really should watch CVC Brasil Operadora e Agência de Viagens's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price.

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.

While we wouldn't worry about CVC Brasil Operadora e Agência de Viagens's net debt to EBITDA ratio of 3.3, we think its super-low interest cover of 0.33 times is a sign of high leverage. It seems clear that the cost of borrowing money is negatively impacting returns for shareholders, of late. 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$70m, over the last twelve months. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, CVC Brasil Operadora e Agência de Viagens actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

On the face of it, CVC Brasil Operadora e Agência de Viagens's level of total liabilities left us tentative about the stock, and its interest cover was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making CVC Brasil Operadora e Agência de Viagens stock a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for CVC Brasil Operadora e Agência de Viagens you should know about.

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.