Is Cyrela Commercial Properties (BVMF:CCPR3) Using Too Much Debt?
Warren Buffett famously said: “Volatility is far from synonymous with risk.” Whenever we think about how risky a business is, we always like to look at the uses of debt as overburdening the debt can lead to ruin. We write that down Cyrela Commercial Properties SA (BVMF: CCPR3) has debt on its balance sheet. But is this debt a concern of shareholders?
When is debt dangerous?
In general, debt only becomes a real problem if a company cannot pay it off simply by raising capital or using its own cash flow. An integral part of capitalism is the process of “creative destruction,” in which failed companies are mercilessly liquidated by their bankers. However, a more common (but still expensive) situation is that a company needs to water down shareholders at a cheap stock price in order to get the debt under control. The advantage of debt, of course, is that it is often cheap capital, especially when it replaces dilution in a company that is able to reinvest with high returns. When thinking about a company’s use of debt, let’s first look at cash and debt together.
Check out our latest analysis for Cyrela Commercial Properties
What is Cyrela Commercial Properties Net Debt?
You can click the graph below to view the historical numbers. However, it shows that in September 2020, Cyrela Commercial Properties had debts of R $ 1.90 billion over one year, an increase of R $ 1.71 billion. However, it has a cash settlement of R $ 612.8 million, resulting in a net debt of approximately R $ 1.28 billion.
BOVESPA: CCPR3 leverage versus equity February 8, 2021
How healthy is Cyrela Commercial Properties’ balance sheet?
The most recent balance sheet shows that Cyrela Commercial Properties has liabilities of R $ 184.5 million due within one year, and liabilities of R $ 1.79 billion also matured. In contrast, R $ 612.8 million in cash and R $ 103.8 million in receivables that were due within 12 months were due. So liabilities are R $ 1.26 billion more than the combination of cash and short-term receivables.
This is a mountain of leverage in relation to its market capitalization of R $ 1.98 billion. This suggests that if the company were in a hurry to prop up its balance sheet, shareholders would be severely diluted.
We measure a company’s debt burden in relation to its earnings power by looking at net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily earnings before interest and taxes (EBIT) cover interest expenses (interest coverage ). The advantage of this approach is that we take into account both the absolute debt volume (with net debt to EBITDA) and the actual interest expenses associated with this debt (with its interest coverage ratio).
Cyrela Commercial Properties’ debt is 3.8 times EBITDA and EBIT is 3.2 times interest expense. Taken together, this means that while we don’t want debt to go up, we believe it can handle its current leverage. We note that Cyrela Commercial Properties increased its EBIT by 27% last year. If it can sustain this kind of improvement, its debt burden will melt away like glaciers in a warming world. There is no doubt that we learn the most about debt from the balance sheet. Ultimately, however, the future profitability of the business will determine whether Cyrela Commercial Properties can strengthen its balance sheet over time. So if you want to see what the professionals think, this free analyst earnings forecast report might be of interest.
After all, a company can only pay off debts with cash, not with accounting profits. So we have to clearly check whether this EBIT leads to a corresponding free cash flow. Over the past three years, Cyrela Commercial Properties has had a stable free cash flow that is 74% of EBIT which we would expect. This free cash flow puts the company in a good position to pay off debt if necessary.
Both Cyrela Commercial Properties’ ability to grow EBIT and converting EBIT to free cash flow gave us consolation that it can manage its debt. On the other hand, interest coverage makes us a little less comfortable with debt. Given this range of data points, we believe Cyrela Commercial Properties is in a good position to manage debt. But be careful: we believe the debt level is high enough to warrant continued monitoring. Clearly, the balance sheet is the area to focus on when analyzing debt. Ultimately, however, any business may have off-balance sheet risks. We identified 1 warning sign with Cyrela Commercial Properties and understanding them should be part of your investment process.
After all that, if you’re more interested in a fast-growing company with a solid balance sheet, be sure to check out our list of net cash growth stocks right now.
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