Is Moura Dubeux Engenharia (BVMF:MDNE3) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Moura Dubeux Engenharia S.A. (BVMF:MDNE3) does have debt on its balance sheet. 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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Moura Dubeux Engenharia

What Is Moura Dubeux Engenharia's Net Debt?

As you can see below, Moura Dubeux Engenharia had R$166.0m of debt at September 2020, down from R$1.17b a year prior. However, because it has a cash reserve of R$51.1m, its net debt is less, at about R$115.0m.

A Look At Moura Dubeux Engenharia's Liabilities

According to the last reported balance sheet, Moura Dubeux Engenharia had liabilities of R$412.0m due within 12 months, and liabilities of R$700.3m due beyond 12 months. Offsetting this, it had R$51.1m in cash and R$285.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$775.9m.

This is a mountain of leverage relative to its market capitalization of R$862.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Moura Dubeux Engenharia 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 Moura Dubeux Engenharia wasn't profitable at an EBIT level, but managed to grow its revenue by 18%, to R$420m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Moura Dubeux Engenharia produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at R$15m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of R$139m into a profit. In the meantime, we consider the stock very risky. For riskier companies like Moura Dubeux Engenharia I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

If you’re looking to trade Moura Dubeux Engenharia, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.