Empresa Constructora Moller y Pérez Cotapos (SNSE:MOLLER) Seems To Be Using A Lot Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Empresa Constructora Moller y Pérez Cotapos S.A. (SNSE:MOLLER) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Empresa Constructora Moller y Pérez Cotapos

How Much Debt Does Empresa Constructora Moller y Pérez Cotapos Carry?

The image below, which you can click on for greater detail, shows that Empresa Constructora Moller y Pérez Cotapos had debt of CL$222.9b at the end of March 2022, a reduction from CL$237.1b over a year. However, it also had CL$5.45b in cash, and so its net debt is CL$217.4b.

How Healthy Is Empresa Constructora Moller y Pérez Cotapos' Balance Sheet?

The latest balance sheet data shows that Empresa Constructora Moller y Pérez Cotapos had liabilities of CL$208.6b due within a year, and liabilities of CL$87.8b falling due after that. Offsetting these obligations, it had cash of CL$5.45b as well as receivables valued at CL$69.4b due within 12 months. So its liabilities total CL$221.6b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CL$25.9b 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. At the end of the day, Empresa Constructora Moller y Pérez Cotapos would probably need a major re-capitalization if its creditors were to demand repayment.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With a net debt to EBITDA ratio of 180, it's fair to say Empresa Constructora Moller y Pérez Cotapos does have a significant amount of debt. However, its interest coverage of 3.8 is reasonably strong, which is a good sign. Worse, Empresa Constructora Moller y Pérez Cotapos's EBIT was down 68% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. There's no doubt that we learn most about debt from the balance sheet. But it is Empresa Constructora Moller y Pérez Cotapos's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Empresa Constructora Moller y Pérez Cotapos recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

On the face of it, Empresa Constructora Moller y Pérez Cotapos's EBIT growth rate left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. And even its conversion of EBIT to free cash flow fails to inspire much confidence. Taking into account all the aforementioned factors, it looks like Empresa Constructora Moller y Pérez Cotapos has too much debt. While some investors love that sort of risky play, it's certainly not our cup of tea. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Empresa Constructora Moller y Pérez Cotapos (2 are a bit concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.