These 4 metrics indicate that BR Properties (BVMF: BRPR3) is using debt reasonably well
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Legendary fund manager Li Lu (who Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, BR Properties SA (BVMF: BRPR3) carries the debt. But the real question is whether this debt makes the business risky.
Why Does Debt Bring Risk?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for BR Properties
How much debt do BR properties carry?
The image below, which you can click for more details, shows that as of June 2021, BR Properties was in debt of R $ 2.63 billion, up from R $ 1.76 billion in one year. However, since it has a cash reserve of R $ 604.7 million, its net debt is lower, at around R $ 2.03 billion.
How healthy is BR Properties’ balance sheet?
The latest balance sheet data shows that BR Properties had debts of R $ 534.4 million due within one year, and R $ 3.42 billion in debts due thereafter. On the other hand, he had cash of R $ 604.7 million and R $ 56.5 million in debts due within one year. It therefore has liabilities totaling 3.30 billion reais more than its combined cash and short-term receivables.
This is a mountain of leverage compared to its market cap of R $ 3.94 billion. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). Thus, we consider debt versus earnings with and without amortization charges.
Low 2.5 times interest coverage and an unusually high 9.6 net debt to EBITDA ratio shook our confidence in BR Properties like a punch in the stomach. This means that we would consider him to be in heavy debt. Looking on the bright side, BR Properties has increased its EBIT by 31% over the past year. Like a mother’s loving embrace of a newborn, this type of growth builds resilience, putting the business in a stronger position to manage debt. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether BR Properties can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, BR Properties has actually generated more free cash flow than EBIT. This kind of strong cash generation warms our hearts like a puppy in a bumblebee costume.
Our point of view
From what we have seen, BR Properties does not find it easy, given its net debt to EBITDA, but the other factors we have taken into account give us cause for optimism. In particular, we are dazzled by its conversion of EBIT into free cash flow. Looking at all of this data, we feel a little cautious about BR Properties’ debt levels. While debt has its advantage in terms of potential higher returns, we think shareholders should definitely consider how leverage levels might make the stock riskier. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks lie on the balance sheet – far from it. Note that BR Properties is displayed 3 warning signs in our investment analysis , you must know…
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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