These 4 measurements indicate that Dexco (BVMF: DXCO3) is using its debt safely

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We note that Dexco SA (BVMF: DXCO3) has a debt on its balance sheet. But the real question is whether this debt makes the business risky.

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own 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) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. The first step in examining a company’s debt levels is to consider its cash flow and debt together.

See our latest review for Dexco

What is Dexco’s net debt?

You can click on the graph below for historical figures, but it shows that Dexco had R $ 3.11 billion in debt in September 2021, up from R $ 3.45 billion a year earlier. However, he also had 1.41 billion reais in cash, so his net debt is 1.71 billion reais.

BOVESPA: DXCO3 History of debt to equity 20 November 2021

How strong is Dexco’s balance sheet?

According to the latest published balance sheet, Dexco had liabilities of 2.68 billion reais due within 12 months and liabilities of 3.77 billion reais due beyond 12 months. In return, he had 1.41 billion reais in cash and 1.78 billion reais in receivables due within 12 months. It therefore has liabilities totaling 3.27 billion reais more than its combined cash and short-term receivables.

While that may sound like a lot, it’s not so bad since Dexco has a market capitalization of R $ 11.8 billion, and could therefore likely strengthen its balance sheet by raising capital if needed. However, it is always worth taking a close look at your ability to repay your debt.

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). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

Dexco’s net debt is only 0.84 times its EBITDA. And its EBIT covers its interest costs 16.7 times more. So we’re pretty relaxed about its ultra-conservative use of debt. Even more impressive was the fact that Dexco increased its EBIT by 253% year over year. If sustained, this growth will make debt even more manageable in the years to come. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Dexco can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Dexco has actually generated more free cash flow than EBIT. This kind of cash conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.

Our point of view

The good news is that Dexco’s demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. And this is only the beginning of good news as its conversion from EBIT to free cash flow is also very encouraging. Overall, we don’t think Dexco is taking bad risks, as its leverage appears modest. We are therefore not worried about the use of a small leverage on the balance sheet. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 5 warning signs with Dexco (at least 1 which is significant), and understanding them should be part of your investment process.

At the end of the day, it’s often best to focus on businesses that don’t have 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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