Is Centro de Imagem Diagnósticos (BVMF:AALR3) 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Centro de Imagem Diagnósticos S.A. (BVMF:AALR3) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Centro de Imagem Diagnósticos

How Much Debt Does Centro de Imagem Diagnósticos Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Centro de Imagem Diagnósticos had debt of R$780.1m, up from R$593.2m in one year. However, it does have R$261.0m in cash offsetting this, leading to net debt of about R$519.1m.

How Healthy Is Centro de Imagem Diagnósticos' Balance Sheet?

The latest balance sheet data shows that Centro de Imagem Diagnósticos had liabilities of R$476.5m due within a year, and liabilities of R$840.4m falling due after that. On the other hand, it had cash of R$261.0m and R$288.7m worth of receivables due within a year. So it has liabilities totalling R$767.2m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Centro de Imagem Diagnósticos has a market capitalization of R$1.41b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without 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 Centro de Imagem Diagnósticos 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 Centro de Imagem Diagnósticos had a loss before interest and tax, and actually shrunk its revenue by 13%, to R$929m. We would much prefer see growth.

Caveat Emptor

While Centro de Imagem Diagnósticos'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 R$21m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of R$97m into a profit. So to be blunt we do think it is risky. 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. Case in point: We've spotted 1 warning sign for Centro de Imagem Diagnósticos 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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