Mitre Realty Empreendimentos e Participações (BVMF:MTRE3) Seems To Use Debt Quite Sensibly

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.' 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 Mitre Realty Empreendimentos e Participações S.A. (BVMF:MTRE3) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Mitre Realty Empreendimentos e Participações

How Much Debt Does Mitre Realty Empreendimentos e Participações Carry?

You can click the graphic below for the historical numbers, but it shows that Mitre Realty Empreendimentos e Participações had R$50.7m of debt in September 2020, down from R$123.5m, one year before. However, it does have R$769.2m in cash offsetting this, leading to net cash of R$718.5m.

How Strong Is Mitre Realty Empreendimentos e Participações' Balance Sheet?

According to the last reported balance sheet, Mitre Realty Empreendimentos e Participações had liabilities of R$216.2m due within 12 months, and liabilities of R$84.6m due beyond 12 months. Offsetting these obligations, it had cash of R$769.2m as well as receivables valued at R$155.5m due within 12 months. So it actually has R$623.8m more liquid assets than total liabilities.

This excess liquidity is a great indication that Mitre Realty Empreendimentos e Participações' balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Mitre Realty Empreendimentos e Participações boasts net cash, so it's fair to say it does not have a heavy debt load!

Mitre Realty Empreendimentos e Participações's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. 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 Mitre Realty Empreendimentos e Participações'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. While Mitre Realty Empreendimentos e Participações has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Mitre Realty Empreendimentos e Participações 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.

Summing up

While it is always sensible to investigate a company's debt, in this case Mitre Realty Empreendimentos e Participações has R$718.5m in net cash and a decent-looking balance sheet. So we don't have any problem with Mitre Realty Empreendimentos e Participações's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Mitre Realty Empreendimentos e Participações (1 makes us a bit uncomfortable) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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