Here's Why Equatorial Maranhão Distribuidora de Energia (BVMF:EQMA3B) Has A Meaningful Debt Burden

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Equatorial Maranhão Distribuidora de Energia S.A. (BVMF:EQMA3B) does use debt in its business. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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 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.

What Is Equatorial Maranhão Distribuidora de Energia's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 Equatorial Maranhão Distribuidora de Energia had R$4.25b of debt, an increase on R$3.53b, over one year. On the flip side, it has R$966.6m in cash leading to net debt of about R$3.28b.

How Healthy Is Equatorial Maranhão Distribuidora de Energia's Balance Sheet?

According to the last reported balance sheet, Equatorial Maranhão Distribuidora de Energia had liabilities of R$2.10b due within 12 months, and liabilities of R$4.99b due beyond 12 months. Offsetting this, it had R$966.6m in cash and R$1.76b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R$4.36b.

This deficit is considerable relative to its market capitalization of R$5.06b, so it does suggest shareholders should keep an eye on Equatorial Maranhão Distribuidora de Energia's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

View our latest analysis for Equatorial Maranhão Distribuidora de Energia

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

We'd say that Equatorial Maranhão Distribuidora de Energia's moderate net debt to EBITDA ratio ( being 2.0), indicates prudence when it comes to debt. And its strong interest cover of 11.0 times, makes us even more comfortable. If Equatorial Maranhão Distribuidora de Energia can keep growing EBIT at last year's rate of 13% over the last year, then it will find its debt load easier to manage. There's no doubt that we learn most about debt from the balance sheet. But it is Equatorial Maranhão Distribuidora de Energia's earnings that will influence how the balance sheet holds up in the future. 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 the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Equatorial Maranhão Distribuidora de Energia 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

Equatorial Maranhão Distribuidora de Energia's struggle to convert EBIT to free cash flow had us second guessing its balance sheet strength, but the other data-points we considered were relatively redeeming. For example its interest cover was refreshing. We should also note that Electric Utilities industry companies like Equatorial Maranhão Distribuidora de Energia commonly do use debt without problems. Taking the abovementioned factors together we do think Equatorial Maranhão Distribuidora de Energia's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Equatorial Maranhão Distribuidora de Energia (including 1 which makes us a bit uncomfortable) .

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.