Transmissora Aliança de Energia Elétrica (BVMF:TAEE11) Takes On Some Risk With Its Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Transmissora Aliança de Energia Elétrica S.A. (BVMF:TAEE11) does use debt in its business. But should shareholders be worried about its use of debt?

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Why Does Debt Bring Risk?

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, 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.

What Is Transmissora Aliança de Energia Elétrica's Debt?

As you can see below, Transmissora Aliança de Energia Elétrica had R$10.4b of debt, at June 2025, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has R$896.9m in cash leading to net debt of about R$9.53b.

A Look At Transmissora Aliança de Energia Elétrica's Liabilities

Zooming in on the latest balance sheet data, we can see that Transmissora Aliança de Energia Elétrica had liabilities of R$2.59b due within 12 months and liabilities of R$11.3b due beyond that. On the other hand, it had cash of R$896.9m and R$2.08b worth of receivables due within a year. So its liabilities total R$10.9b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of R$12.3b, so it does suggest shareholders should keep an eye on Transmissora Aliança de Energia Elétrica's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

See 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Transmissora Aliança de Energia Elétrica's debt is 3.9 times its EBITDA, and its EBIT cover its interest expense 3.3 times over. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. However, one redeeming factor is that Transmissora Aliança de Energia Elétrica grew its EBIT at 17% over the last 12 months, boosting its ability to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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, a company can only pay off debt with cold hard cash, not accounting profits. 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 62% 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

While Transmissora Aliança de Energia Elétrica's net debt to EBITDA does give us pause, its EBIT growth rate and conversion of EBIT to free cash flow suggest it can stay on top of its debt load. It's also worth noting that Transmissora Aliança de Energia Elétrica is in the Electric Utilities industry, which is often considered to be quite defensive. Looking at all the angles mentioned above, it does seem to us that Transmissora Aliança de Energia Elétrica is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. 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. We've identified 2 warning signs with Transmissora Aliança de Energia Elétrica (at least 1 which is concerning) , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.