We believe that Echeverría Izquierdo (SNSE: EISA) is taking risks with its debt
Warren Buffett said: “Volatility is far from synonymous with risk”. 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 Echeverria Izquierdo SA (SNSE: EISA) has debt on its balance sheet. But should shareholders be concerned about its use of debt?
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that he has to raise new equity at low cost, thereby constantly diluting shareholders. 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. 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 EcheverrÃa Izquierdo
What is the net debt of EcheverrÃa Izquierdo?
You can click on the graph below for historical figures, but it shows that in June 2021 EcheverrÃa Izquierdo had CL $ 150.5 billion in debt, an increase from CL $ 120.0 billion, over a year. However, it has CL $ 39.7 billion in cash offsetting this, which leads to net debt of around CL $ 110.8 billion.
How strong is EcheverrÃa Izquierdo’s balance sheet?
Zooming in on the latest balance sheet data, we can see that EcheverrÃa Izquierdo had liabilities of CL $ 233.6 billion due within 12 months and CL $ 69.8 billion liabilities beyond. In return, he had CL $ 39.7 billion in cash and CL $ 63.3 billion in receivables due within 12 months. It therefore has liabilities totaling C $ 200.4 billion more than its cash and short-term receivables combined.
This deficit casts a shadow over the CL $ 71.6 billion company like a towering colossus of mere mortals. We therefore believe that shareholders should watch it closely. Ultimately, EcheverrÃa Izquierdo would likely need a major recapitalization if his creditors demanded repayment.
We measure a company’s debt load relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (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).
EcheverrÃa Izquierdo’s debt is 4.6 times its EBITDA, and its EBIT covers its interest charges 4.1 times. This suggests that while debt levels are significant, we would stop calling them problematic. However, shareholders should remember that EcheverrÃa Izquierdo has actually increased its EBIT by 121% over the past 12 months. If he can continue on this path, he will be able to deleverage with relative ease. There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of EcheverrÃa Izquierdo that will influence the balance sheet in the future. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, EcheverrÃa Izquierdo has created free cash flow amounting to 3.1% of its EBIT, a performance without interest. This low level of cash conversion undermines its ability to manage and repay its debts.
Our point of view
We would go so far as to say that EcheverrÃa Izquierdo’s level of total liabilities was disappointing. But at least it’s decent enough to increase your EBIT; it’s encouraging. We’re pretty clear that we consider EcheverrÃa Izquierdo to be really quite risky, due to the health of his balance sheet. For this reason, we are fairly cautious about the stock, and we believe shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. We have identified 3 warning signs with EcheverrÃa Izquierdo (at least 1 which is a bit rude), and understanding them should be part of your investment process.
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 material. Simply Wall St has no position in any of the stocks mentioned.
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