Is Conduril - Engenharia (ELI:CDU) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Conduril - Engenharia, S.A. (ELI:CDU) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Conduril - Engenharia

How Much Debt Does Conduril - Engenharia Carry?

You can click the graphic below for the historical numbers, but it shows that Conduril - Engenharia had €57.3m of debt in December 2020, down from €60.5m, one year before. However, it also had €8.85m in cash, and so its net debt is €48.4m.

A Look At Conduril - Engenharia's Liabilities

Zooming in on the latest balance sheet data, we can see that Conduril - Engenharia had liabilities of €131.1m due within 12 months and liabilities of €67.6m due beyond that. Offsetting these obligations, it had cash of €8.85m as well as receivables valued at €157.5m due within 12 months. So its liabilities total €32.4m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Conduril - Engenharia is worth €57.6m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But it is Conduril - Engenharia's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Conduril - Engenharia made a loss at the EBIT level, and saw its revenue drop to €126m, which is a fall of 20%. That's not what we would hope to see.

Caveat Emptor

While Conduril - Engenharia's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable €6.7m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled €574k in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For instance, we've identified 4 warning signs for Conduril - Engenharia (2 are concerning) you should be aware of.

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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