Would Fica Empreendimentos Imobiliarios (BVMF:FIEI3) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Fica Empreendimentos Imobiliarios S.A (BVMF:FIEI3) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Fica Empreendimentos Imobiliarios

What Is Fica Empreendimentos Imobiliarios's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Fica Empreendimentos Imobiliarios had debt of R$10.5m, up from R$9.0k in one year. On the flip side, it has R$2.01m in cash leading to net debt of about R$8.45m.

A Look At Fica Empreendimentos Imobiliarios' Liabilities

According to the last reported balance sheet, Fica Empreendimentos Imobiliarios had liabilities of R$11.1m due within 12 months, and liabilities of R$16.6m due beyond 12 months. On the other hand, it had cash of R$2.01m and R$3.41m worth of receivables due within a year. So it has liabilities totalling R$22.2m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of R$31.5m, so it does suggest shareholders should keep an eye on Fica Empreendimentos Imobiliarios' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Fica Empreendimentos Imobiliarios's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Fica Empreendimentos Imobiliarios made a loss at the EBIT level, and saw its revenue drop to R$2.8m, which is a fall of 30%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Fica Empreendimentos Imobiliarios's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable R$7.3m 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through R$14m of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Fica Empreendimentos Imobiliarios is showing 4 warning signs in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.

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