Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Helbor Empreendimentos S.A. (BVMF:HBOR3) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is Helbor Empreendimentos's Net Debt?
As you can see below, Helbor Empreendimentos had R$1.38b of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it also had R$442.9m in cash, and so its net debt is R$938.0m.
How Healthy Is Helbor Empreendimentos' Balance Sheet?
The latest balance sheet data shows that Helbor Empreendimentos had liabilities of R$938.5m due within a year, and liabilities of R$1.67b falling due after that. Offsetting this, it had R$442.9m in cash and R$525.6m in receivables that were due within 12 months. So it has liabilities totalling R$1.64b more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of R$1.12b, we think shareholders really should watch Helbor Empreendimentos's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Helbor Empreendimentos has a rather high debt to EBITDA ratio of 36.0 which suggests a meaningful debt load. But the good news is that it boasts fairly comforting interest cover of 3.4 times, suggesting it can responsibly service its obligations. One redeeming factor for Helbor Empreendimentos is that it turned last year's EBIT loss into a gain of R$17m, over the last twelve months. 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 Helbor Empreendimentos's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Over the last year, Helbor Empreendimentos 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.
To be frank both Helbor Empreendimentos's net debt to EBITDA and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. But at least its EBIT growth rate is not so bad. Taking into account all the aforementioned factors, it looks like Helbor Empreendimentos has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Helbor Empreendimentos (including 1 which is a bit concerning) .
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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