Does Moura Dubeux Engenharia (BVMF:MDNE3) Have A Healthy Balance Sheet?

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 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 note that Moura Dubeux Engenharia S.A. (BVMF:MDNE3) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Moura Dubeux Engenharia

What Is Moura Dubeux Engenharia's Debt?

The image below, which you can click on for greater detail, shows that Moura Dubeux Engenharia had debt of R$80.2m at the end of March 2022, a reduction from R$134.8m over a year. But on the other hand it also has R$139.3m in cash, leading to a R$59.2m net cash position.

How Strong Is Moura Dubeux Engenharia's Balance Sheet?

We can see from the most recent balance sheet that Moura Dubeux Engenharia had liabilities of R$476.8m falling due within a year, and liabilities of R$1.04b due beyond that. Offsetting these obligations, it had cash of R$139.3m as well as receivables valued at R$296.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$1.08b.

This deficit casts a shadow over the R$497.7m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Moura Dubeux Engenharia would probably need a major re-capitalization if its creditors were to demand repayment. Given that Moura Dubeux Engenharia has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Better yet, Moura Dubeux Engenharia grew its EBIT by 706% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Moura Dubeux Engenharia'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Moura Dubeux Engenharia may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Moura Dubeux Engenharia actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Moura Dubeux Engenharia does have more liabilities than liquid assets, it also has net cash of R$59.2m. And it impressed us with free cash flow of R$84m, being 150% of its EBIT. So we don't have any problem with Moura Dubeux Engenharia's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Moura Dubeux Engenharia, you may well want to click here to check an interactive graph of its earnings per share history.

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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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.