We Think Moura Dubeux Engenharia (BVMF:MDNE3) Can Stay On Top Of Its 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. As with many other companies Moura Dubeux Engenharia S.A. (BVMF:MDNE3) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Moura Dubeux Engenharia

What Is Moura Dubeux Engenharia's Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Moura Dubeux Engenharia had debt of R$147.0m, up from R$80.2m in one year. But on the other hand it also has R$206.3m in cash, leading to a R$59.3m net cash position.

How Strong Is Moura Dubeux Engenharia's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Moura Dubeux Engenharia had liabilities of R$387.7m due within 12 months and liabilities of R$1.33b due beyond that. On the other hand, it had cash of R$206.3m and R$463.8m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$1.04b.

The deficiency here weighs heavily on the R$539.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Moura Dubeux Engenharia would probably need a major re-capitalization if its creditors were to demand repayment. Given that Moura Dubeux Engenharia has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Also good is that Moura Dubeux Engenharia grew its EBIT at 20% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Moura Dubeux Engenharia'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Moura Dubeux Engenharia has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Moura Dubeux Engenharia recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Moura Dubeux Engenharia's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of R$59.3m. And it impressed us with free cash flow of R$21m, being 73% of its EBIT. So we don't have any problem with Moura Dubeux Engenharia's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Moura Dubeux Engenharia, you may well want to click here to check an interactive graph of its earnings per share history.

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.