Melnick Desenvolvimento Imobiliário (BVMF:MELK3) Has A Pretty Healthy Balance Sheet

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Melnick Desenvolvimento Imobiliário S.A. (BVMF:MELK3) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Melnick Desenvolvimento Imobiliário

What Is Melnick Desenvolvimento Imobiliário's Debt?

As you can see below, at the end of September 2024, Melnick Desenvolvimento Imobiliário had R$355.2m of debt, up from R$319.6m a year ago. Click the image for more detail. But it also has R$512.3m in cash to offset that, meaning it has R$157.0m net cash.

AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early.

A Look At Melnick Desenvolvimento Imobiliário's Liabilities

Zooming in on the latest balance sheet data, we can see that Melnick Desenvolvimento Imobiliário had liabilities of R$750.9m due within 12 months and liabilities of R$430.2m due beyond that. Offsetting these obligations, it had cash of R$512.3m as well as receivables valued at R$722.5m due within 12 months. So it can boast R$53.7m more liquid assets than total liabilities.

This short term liquidity is a sign that Melnick Desenvolvimento Imobiliário could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Melnick Desenvolvimento Imobiliário boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Melnick Desenvolvimento Imobiliário has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Melnick Desenvolvimento Imobiliário 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, a company can only pay off debt with cold hard cash, not accounting profits. While Melnick Desenvolvimento Imobiliário 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. During the last three years, Melnick Desenvolvimento Imobiliário burned a lot of cash. 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 Melnick Desenvolvimento Imobiliário has net cash of R$157.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 53% year-on-year EBIT growth. So we don't have any problem with Melnick Desenvolvimento Imobiliário's use of debt. 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. We've identified 1 warning sign with Melnick Desenvolvimento Imobiliário , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.