These 4 Measures Indicate That EcoRodovias Infraestrutura e Logística (BVMF:ECOR3) 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.' 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 can see that EcoRodovias Infraestrutura e Logística S.A. (BVMF:ECOR3) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for EcoRodovias Infraestrutura e Logística

How Much Debt Does EcoRodovias Infraestrutura e Logística Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 EcoRodovias Infraestrutura e Logística had R$9.96b of debt, an increase on R$8.46b, over one year. However, it also had R$2.17b in cash, and so its net debt is R$7.79b.

A Look At EcoRodovias Infraestrutura e Logística's Liabilities

The latest balance sheet data shows that EcoRodovias Infraestrutura e Logística had liabilities of R$4.08b due within a year, and liabilities of R$9.98b falling due after that. Offsetting this, it had R$2.17b in cash and R$336.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$11.6b.

This deficit casts a shadow over the R$5.04b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, EcoRodovias Infraestrutura e Logística would probably need a major re-capitalization if its creditors were to demand repayment.

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.

EcoRodovias Infraestrutura e Logística's debt is 3.5 times its EBITDA, and its EBIT cover its interest expense 3.8 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. On the other hand, EcoRodovias Infraestrutura e Logística grew its EBIT by 20% in the last year. If it can maintain that kind of improvement, its debt load will begin to melt away like glaciers in a warming world. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if EcoRodovias Infraestrutura e Logística 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, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, EcoRodovias Infraestrutura e Logística reported free cash flow worth 6.8% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Our View

Mulling over EcoRodovias Infraestrutura e Logística's attempt at staying on top of its total liabilities, we're certainly not enthusiastic. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. We should also note that Infrastructure industry companies like EcoRodovias Infraestrutura e Logística commonly do use debt without problems. Overall, it seems to us that EcoRodovias Infraestrutura e Logística's balance sheet is really quite a risk to the business. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example EcoRodovias Infraestrutura e Logística has 3 warning signs (and 2 which can't be ignored) we think you should know about.

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.