Transmissora Aliança de Energia Elétrica (BVMF:TAEE11) Has A Somewhat Strained Balance Sheet

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.' 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 note that Transmissora Aliança de Energia Elétrica S.A. (BVMF:TAEE11) does have debt on its balance sheet. But is this debt a concern to shareholders?

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What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Transmissora Aliança de Energia Elétrica's Debt?

The image below, which you can click on for greater detail, shows that at March 2025 Transmissora Aliança de Energia Elétrica had debt of R$10.4b, up from R$9.90b in one year. On the flip side, it has R$802.6m in cash leading to net debt of about R$9.56b.

How Strong Is Transmissora Aliança de Energia Elétrica's Balance Sheet?

We can see from the most recent balance sheet that Transmissora Aliança de Energia Elétrica had liabilities of R$1.68b falling due within a year, and liabilities of R$12.0b due beyond that. Offsetting this, it had R$802.6m in cash and R$2.02b in receivables that were due within 12 months. So its liabilities total R$10.9b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of R$11.8b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

View our latest analysis for Transmissora Aliança de Energia Elétrica

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).

Transmissora Aliança de Energia Elétrica's debt is 4.2 times its EBITDA, and its EBIT cover its interest expense 3.2 times over. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. On a slightly more positive note, Transmissora Aliança de Energia Elétrica grew its EBIT at 17% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Transmissora Aliança de Energia Elétrica 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, Transmissora Aliança de Energia Elétrica recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Even if we have reservations about how easily Transmissora Aliança de Energia Elétrica is capable of managing its debt, based on its EBITDA,, its EBIT growth rate and conversion of EBIT to free cash flow make us think feel relatively unconcerned. We should also note that Electric Utilities industry companies like Transmissora Aliança de Energia Elétrica commonly do use debt without problems. We think that Transmissora Aliança de Energia Elétrica's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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. We've identified 2 warning signs with Transmissora Aliança de Energia Elétrica (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

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.

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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.