Does Ampla Energia e Serviços (BVMF:CBEE3) Have A Healthy Balance Sheet?

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 can see that Ampla Energia e Serviços S.A. (BVMF:CBEE3) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Ampla Energia e Serviços

How Much Debt Does Ampla Energia e Serviços Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Ampla Energia e Serviços had R$4.88b of debt, an increase on R$4.09b, over one year. However, it also had R$795.4m in cash, and so its net debt is R$4.09b.

How Strong Is Ampla Energia e Serviços' Balance Sheet?

We can see from the most recent balance sheet that Ampla Energia e Serviços had liabilities of R$3.57b falling due within a year, and liabilities of R$4.65b due beyond that. Offsetting this, it had R$795.4m in cash and R$2.35b in receivables that were due within 12 months. So it has liabilities totalling R$5.07b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the R$2.62b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Ampla Energia e Serviços would likely require a major re-capitalisation if it had to pay its creditors today.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Ampla Energia e Serviços has a debt to EBITDA ratio of 4.4 and its EBIT covered its interest expense 2.7 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Even worse, Ampla Energia e Serviços saw its EBIT tank 27% over the last 12 months. If earnings keep going like that over the long term, it has a snowball's chance in hell of paying off that debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Ampla Energia e Serviços will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Ampla Energia e Serviços saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Ampla Energia e Serviços's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. And furthermore, its interest cover also fails to instill confidence. It's also worth noting that Ampla Energia e Serviços is in the Electric Utilities industry, which is often considered to be quite defensive. We think the chances that Ampla Energia e Serviços has too much debt a very significant. To our minds, that means the stock is rather high risk, and probably one to avoid; but to each their own (investing) style. 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 5 warning signs for Ampla Energia e Serviços (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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