Is BrasilAgro - Companhia Brasileira de Propriedades Agrícolas (BVMF:AGRO3) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 BrasilAgro - Companhia Brasileira de Propriedades Agrícolas (BVMF:AGRO3) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for BrasilAgro - Companhia Brasileira de Propriedades Agrícolas

What Is BrasilAgro - Companhia Brasileira de Propriedades Agrícolas's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 BrasilAgro - Companhia Brasileira de Propriedades Agrícolas had debt of R$554.6m, up from R$454.7m in one year. However, it also had R$412.0m in cash, and so its net debt is R$142.6m.

How Healthy Is BrasilAgro - Companhia Brasileira de Propriedades Agrícolas' Balance Sheet?

The latest balance sheet data shows that BrasilAgro - Companhia Brasileira de Propriedades Agrícolas had liabilities of R$631.9m due within a year, and liabilities of R$679.0m falling due after that. Offsetting these obligations, it had cash of R$412.0m as well as receivables valued at R$430.0m due within 12 months. So it has liabilities totalling R$468.9m more than its cash and near-term receivables, combined.

Of course, BrasilAgro - Companhia Brasileira de Propriedades Agrícolas has a market capitalization of R$2.68b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

BrasilAgro - Companhia Brasileira de Propriedades Agrícolas has a low net debt to EBITDA ratio of only 0.41. And its EBIT easily covers its interest expense, being 78.2 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. It is just as well that BrasilAgro - Companhia Brasileira de Propriedades Agrícolas's load is not too heavy, because its EBIT was down 62% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if BrasilAgro - Companhia Brasileira de Propriedades Agrícolas 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Looking at the most recent three years, BrasilAgro - Companhia Brasileira de Propriedades Agrícolas recorded free cash flow of 29% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

While BrasilAgro - Companhia Brasileira de Propriedades Agrícolas's EBIT growth rate has us nervous. To wit both its interest cover and net debt to EBITDA were encouraging signs. We think that BrasilAgro - Companhia Brasileira de Propriedades Agrícolas's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. For example BrasilAgro - Companhia Brasileira de Propriedades Agrícolas has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.