Compañía Agropecuaria Copeval (SNSE:COPEVAL) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Compañía Agropecuaria Copeval S.A. (SNSE:COPEVAL) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Compañía Agropecuaria Copeval

What Is Compañía Agropecuaria Copeval's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Compañía Agropecuaria Copeval had CL$139.6b of debt in September 2020, down from CL$166.7b, one year before. On the flip side, it has CL$34.7b in cash leading to net debt of about CL$104.9b.

How Strong Is Compañía Agropecuaria Copeval's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Compañía Agropecuaria Copeval had liabilities of CL$141.7b due within 12 months and liabilities of CL$98.1b due beyond that. Offsetting these obligations, it had cash of CL$34.7b as well as receivables valued at CL$101.3b due within 12 months. So its liabilities total CL$103.7b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CL$30.9b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Compañía Agropecuaria Copeval would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Compañía Agropecuaria Copeval has a rather high debt to EBITDA ratio of 5.7 which suggests a meaningful debt load. But the good news is that it boasts fairly comforting interest cover of 3.3 times, suggesting it can responsibly service its obligations. The silver lining is that Compañía Agropecuaria Copeval grew its EBIT by 101% last year, which nourishing like the idealism of youth. If it can keep walking that path it will be in a position to shed its debt with relative ease. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Compañía Agropecuaria Copeval will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Happily for any shareholders, Compañía Agropecuaria Copeval actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

We feel some trepidation about Compañía Agropecuaria Copeval's difficulty level of total liabilities, but we've got positives to focus on, too. To wit both its conversion of EBIT to free cash flow and EBIT growth rate were encouraging signs. When we consider all the factors discussed, it seems to us that Compañía Agropecuaria Copeval is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Compañía Agropecuaria Copeval (1 is potentially serious!) that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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