These 4 Measures Indicate That Helbor Empreendimentos (BVMF:HBOR3) Is Using Debt Extensively

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Helbor Empreendimentos S.A. (BVMF:HBOR3) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Helbor Empreendimentos

What Is Helbor Empreendimentos's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Helbor Empreendimentos had R$1.25b of debt in September 2021, down from R$1.61b, one year before. However, because it has a cash reserve of R$361.7m, its net debt is less, at about R$885.0m.

How Strong Is Helbor Empreendimentos' Balance Sheet?

The latest balance sheet data shows that Helbor Empreendimentos had liabilities of R$1.05b due within a year, and liabilities of R$1.37b falling due after that. Offsetting this, it had R$361.7m in cash and R$499.8m in receivables that were due within 12 months. So its liabilities total R$1.55b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the R$489.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Helbor Empreendimentos would likely require a major re-capitalisation if it had to pay its creditors today.

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.

Strangely Helbor Empreendimentos has a sky high EBITDA ratio of 10.8, implying high debt, but a strong interest coverage of 38.8. This means that unless the company has access to very cheap debt, that interest expense will likely grow in the future. Notably, Helbor Empreendimentos made a loss at the EBIT level, last year, but improved that to positive EBIT of R$68m in the last twelve months. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, Helbor Empreendimentos 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.

Our View

On the face of it, Helbor Empreendimentos's conversion of EBIT to free cash flow left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. After considering the datapoints discussed, we think Helbor Empreendimentos has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. 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. Be aware that Helbor Empreendimentos is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

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.