Would Centro de Imagem Diagnósticos (BVMF:AALR3) Be Better Off With Less 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.' 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. As with many other companies Centro de Imagem Diagnósticos S.A. (BVMF:AALR3) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Centro de Imagem Diagnósticos

What Is Centro de Imagem Diagnósticos's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Centro de Imagem Diagnósticos had R$802.1m of debt, an increase on R$642.3m, over one year. On the flip side, it has R$244.7m in cash leading to net debt of about R$557.4m.

How Strong Is Centro de Imagem Diagnósticos' Balance Sheet?

We can see from the most recent balance sheet that Centro de Imagem Diagnósticos had liabilities of R$615.8m falling due within a year, and liabilities of R$728.1m due beyond that. On the other hand, it had cash of R$244.7m and R$298.3m worth of receivables due within a year. So its liabilities total R$800.9m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of R$1.32b, so it does suggest shareholders should keep an eye on Centro de Imagem Diagnósticos' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Centro de Imagem Diagnósticos had a loss before interest and tax, and actually shrunk its revenue by 16%, to R$898m. We would much prefer see growth.

Caveat Emptor

Not only did Centro de Imagem Diagnósticos's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at R$28m. 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. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of R$103m into a profit. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Centro de Imagem Diagnósticos , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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