These 4 Measures Indicate That Melnick Desenvolvimento Imobiliário (BVMF:MELK3) Is Using Debt Reasonably Well

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Melnick Desenvolvimento Imobiliário S.A. (BVMF:MELK3) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Melnick Desenvolvimento Imobiliário

What Is Melnick Desenvolvimento Imobiliário's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Melnick Desenvolvimento Imobiliário had debt of R$295.3m, up from R$186.7m in one year. But on the other hand it also has R$448.9m in cash, leading to a R$153.6m net cash position.

How Strong Is Melnick Desenvolvimento Imobiliário's Balance Sheet?

The latest balance sheet data shows that Melnick Desenvolvimento Imobiliário had liabilities of R$660.1m due within a year, and liabilities of R$423.4m falling due after that. On the other hand, it had cash of R$448.9m and R$704.9m worth of receivables due within a year. So it actually has R$70.3m more liquid assets than total liabilities.

This surplus suggests that Melnick Desenvolvimento Imobiliário has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Melnick Desenvolvimento Imobiliário boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that Melnick Desenvolvimento Imobiliário grew its EBIT at 15% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Melnick Desenvolvimento Imobiliário'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Melnick Desenvolvimento Imobiliário saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Melnick Desenvolvimento Imobiliário has R$153.6m in net cash and a decent-looking balance sheet. And we liked the look of last year's 15% year-on-year EBIT growth. So we don't have any problem with Melnick Desenvolvimento Imobiliário'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 be aware of the 1 warning sign we've spotted with Melnick Desenvolvimento Imobiliário .

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.

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