Companhia Brasileira de Alumínio (BVMF:CBAV3) Use Of Debt Could Be Considered Risky

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. As with many other companies Companhia Brasileira de Alumínio (BVMF:CBAV3) makes use of debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Companhia Brasileira de Alumínio's Net Debt?

The image below, which you can click on for greater detail, shows that Companhia Brasileira de Alumínio had debt of R$3.86b at the end of March 2025, a reduction from R$4.49b over a year. However, it also had R$857.7m in cash, and so its net debt is R$3.00b.

A Look At Companhia Brasileira de Alumínio's Liabilities

Zooming in on the latest balance sheet data, we can see that Companhia Brasileira de Alumínio had liabilities of R$2.37b due within 12 months and liabilities of R$6.48b due beyond that. Offsetting these obligations, it had cash of R$857.7m as well as receivables valued at R$910.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$7.08b.

This deficit casts a shadow over the R$3.07b 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, Companhia Brasileira de Alumínio would probably need a major re-capitalization if its creditors were to demand repayment.

See our latest analysis for Companhia Brasileira de Alumínio

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.

Companhia Brasileira de Alumínio's net debt is sitting at a very reasonable 2.1 times its EBITDA, while its EBIT covered its interest expense just 2.6 times last year. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. Notably, Companhia Brasileira de Alumínio made a loss at the EBIT level, last year, but improved that to positive EBIT of R$841m in 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 Companhia Brasileira de Alumínio 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. In the last year, Companhia Brasileira de Alumínio created free cash flow amounting to 11% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

Mulling over Companhia Brasileira de Alumínio's attempt at staying on top of its total liabilities, we're certainly not enthusiastic. Having said that, its ability to grow its EBIT isn't such a worry. We're quite clear that we consider Companhia Brasileira de Alumínio to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Companhia Brasileira de Alumínio (including 1 which is potentially serious) .

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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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.