Is Zenvia (NASDAQ:ZENV) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Zenvia Inc. (NASDAQ:ZENV) 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?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Zenvia Carry?

The image below, which you can click on for greater detail, shows that at December 2024 Zenvia had debt of R$126.9m, up from R$87.8m in one year. However, because it has a cash reserve of R$116.9m, its net debt is less, at about R$9.97m.

How Healthy Is Zenvia's Balance Sheet?

According to the last reported balance sheet, Zenvia had liabilities of R$674.8m due within 12 months, and liabilities of R$297.4m due beyond 12 months. Offsetting this, it had R$116.9m in cash and R$190.8m in receivables that were due within 12 months. So it has liabilities totalling R$664.5m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the R$370.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Zenvia would probably need a major re-capitalization if its creditors were to demand repayment.

See our latest analysis for Zenvia

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Zenvia has a very low debt to EBITDA ratio of 0.31 so it is strange to see weak interest coverage, with last year's EBIT being only 0.23 times the interest expense. So while we're not necessarily alarmed we think that its debt is far from trivial. We also note that Zenvia improved its EBIT from a last year's loss to a positive R$14m. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Zenvia's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, Zenvia actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

On the face of it, Zenvia's interest cover 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. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. Once we consider all the factors above, together, it seems to us that Zenvia's debt is making it a bit risky. Some people like that sort of risk, but we're mindful of the potential pitfalls, so we'd probably prefer it carry less debt. 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. For instance, we've identified 3 warning signs for Zenvia (1 is a bit unpleasant) you should be aware of.

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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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.