Helbor Empreendimentos (BVMF:HBOR3) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 can see that Helbor Empreendimentos S.A. (BVMF:HBOR3) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Helbor Empreendimentos

What Is Helbor Empreendimentos's Debt?

As you can see below, Helbor Empreendimentos had R$1.59b of debt at September 2020, down from R$1.76b a year prior. However, it also had R$658.0m in cash, and so its net debt is R$934.3m.

A Look At Helbor Empreendimentos's Liabilities

The latest balance sheet data shows that Helbor Empreendimentos had liabilities of R$984.5m due within a year, and liabilities of R$1.89b falling due after that. Offsetting this, it had R$658.0m in cash and R$577.4m 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$1.47b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Helbor Empreendimentos 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.

In the last year Helbor Empreendimentos wasn't profitable at an EBIT level, but managed to grow its revenue by 42%, to R$1.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

While we can certainly appreciate Helbor Empreendimentos's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. To be specific the EBIT loss came in at R$77m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of R$51m over the last twelve months. So suffice it to say we consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Helbor Empreendimentos's profit, revenue, and operating cashflow have changed over the last few years.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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