Does Cogna Educação (BVMF: COGN3) use too much debt?

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Cogna Educação SA (BVMF: COGN3) uses debt. But does this debt concern shareholders?

When Is Debt a Problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. 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. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.

Check out our latest review for Cogna Educação

What is Cogna Educação’s debt?

You can click on the graph below for historical figures, but it shows that Cogna Educação had a debt of R $ 6.50 billion in March 2021, up from R $ 7.98 billion a year earlier. However, because it has a cash reserve of 3.48 billion reais, its net debt is less, at around 3.02 billion reais.

BOVESPA: COGN3 History of debt to equity July 20, 2021

Is Cogna Educação’s record healthy?

Zooming in on the latest balance sheet data, we can see that Cogna Educação had R $ 9.63 billion in liabilities due within 12 months and R $ 5.97 billion in liabilities due beyond. In compensation for these obligations, it had cash of 3.48 billion reais as well as debts valued at 2.10 billion reais due within 12 months. It therefore has liabilities totaling R $ 10.0 billion more than its combined cash and short-term receivables.

Given that this deficit is actually greater than the company’s market cap of R $ 7.59 billion, we believe shareholders should really watch Cogna Educação’s debt levels, like a parent watching their child do. cycling for the first time. Hypothetically, extremely high dilution would be required if the company were forced to repay its debts by raising capital at the current share price. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the future profitability of the business will decide whether Cogna Educação can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Over 12 months, Cogna Educação recorded a loss in EBIT and saw its turnover fall to 4.9 billion reais, a decrease of 17%. We would much prefer to see the growth.

Emptor Warning

While Cogna Educação’s declining income is about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less appealing. Indeed, he lost 808 million reais very considerable in terms of EBIT. When we look at this alongside the material liabilities, we’re not particularly confident in the business. We would like to see big improvements in the short term before we get too interested in the title. It is fair to say that the loss of 3.6 billion reais did not encourage us either; we would like to see a profit. In the meantime, we consider the title to be risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we discovered 1 warning sign for Cogna Educação which you should know before investing here.

If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.

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