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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Mitre Realty Empreendimentos e Participações S.A. (BVMF:MTRE3) does carry debt. But the real question is whether this debt is making the company risky.

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Mitre Realty Empreendimentos e Participações

What Is Mitre Realty Empreendimentos e Participações's Debt?

The image below, which you can click on for greater detail, shows that Mitre Realty Empreendimentos e Participações had debt of R$58.1m at the end of June 2021, a reduction from R$64.4m over a year. But on the other hand it also has R$463.2m in cash, leading to a R$405.1m net cash position.

A Look At Mitre Realty Empreendimentos e Participações' Liabilities

We can see from the most recent balance sheet that Mitre Realty Empreendimentos e Participações had liabilities of R$270.2m falling due within a year, and liabilities of R$96.5m due beyond that. On the other hand, it had cash of R$463.2m and R$208.8m worth of receivables due within a year. So it can boast R$305.3m more liquid assets than total liabilities.

This surplus strongly suggests that Mitre Realty Empreendimentos e Participações has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Mitre Realty Empreendimentos e Participações has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Mitre Realty Empreendimentos e Participações grew its EBIT by 167% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Mitre Realty Empreendimentos e Participações can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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$405.1m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 167% over the last year. So we don't think Mitre Realty Empreendimentos e Participações's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Mitre Realty Empreendimentos e Participações (1 is significant!) that you should be aware of before investing here.

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.

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.

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