Does Mitre Realty Empreendimentos e Participações (BVMF:MTRE3) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. We note that Mitre Realty Empreendimentos e Participações S.A. (BVMF:MTRE3) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Mitre Realty Empreendimentos e Participações

What Is Mitre Realty Empreendimentos e Participações's Debt?

The chart below, which you can click on for greater detail, shows that Mitre Realty Empreendimentos e Participações had R$580.0m in debt in June 2024; about the same as the year before. However, because it has a cash reserve of R$212.6m, its net debt is less, at about R$367.4m.

A Look At Mitre Realty Empreendimentos e Participações' Liabilities

The latest balance sheet data shows that Mitre Realty Empreendimentos e Participações had liabilities of R$657.3m due within a year, and liabilities of R$372.8m falling due after that. Offsetting this, it had R$212.6m in cash and R$688.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$129.4m.

Mitre Realty Empreendimentos e Participações has a market capitalization of R$378.7m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

As it happens Mitre Realty Empreendimentos e Participações has a fairly concerning net debt to EBITDA ratio of 6.7 but very strong interest coverage of 1k. So either it has access to very cheap long term debt or that interest expense is going to grow! If Mitre Realty Empreendimentos e Participações can keep growing EBIT at last year's rate of 19% over the last year, then it will find its debt load easier to manage. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Mitre Realty Empreendimentos e Participações can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Mitre Realty Empreendimentos e Participações 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.

Our View

Mitre Realty Empreendimentos e Participações's conversion of EBIT to free cash flow and net debt to EBITDA definitely weigh on it, in our esteem. But its interest cover tells a very different story, and suggests some resilience. We think that Mitre Realty Empreendimentos e Participações's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 4 warning signs with Mitre Realty Empreendimentos e Participações , and understanding them should be part of your investment process.

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.