These 4 Measures Indicate That Lavvi Empreendimentos Imobiliários (BVMF:LAVV3) Is Using Debt Reasonably Well

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 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. Importantly, Lavvi Empreendimentos Imobiliários S.A. (BVMF:LAVV3) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Lavvi Empreendimentos Imobiliários

What Is Lavvi Empreendimentos Imobiliários's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Lavvi Empreendimentos Imobiliários had debt of R$213.5m, up from R$42.6m in one year. But on the other hand it also has R$373.7m in cash, leading to a R$160.2m net cash position.

A Look At Lavvi Empreendimentos Imobiliários' Liabilities

According to the last reported balance sheet, Lavvi Empreendimentos Imobiliários had liabilities of R$352.8m due within 12 months, and liabilities of R$450.9m due beyond 12 months. On the other hand, it had cash of R$373.7m and R$519.6m worth of receivables due within a year. So it actually has R$89.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Lavvi Empreendimentos Imobiliários could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Lavvi Empreendimentos Imobiliários has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Lavvi Empreendimentos Imobiliários grew its EBIT by 106% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Lavvi Empreendimentos Imobiliários's ability to maintain a healthy balance sheet going forward. 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. Lavvi Empreendimentos Imobiliários may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Lavvi Empreendimentos Imobiliários saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Lavvi Empreendimentos Imobiliários has net cash of R$160.2m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 106% over the last year. So we don't have any problem with Lavvi Empreendimentos Imobiliários's use of debt. 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. To that end, you should learn about the 2 warning signs we've spotted with Lavvi Empreendimentos Imobiliários (including 1 which is potentially serious) .

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.