Is Empresa Constructora Moller y Pérez Cotapos (SNSE:MOLLER) A Risky Investment?

Warren Buffett famously said, '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. Importantly, Empresa Constructora Moller y Pérez Cotapos S.A. (SNSE:MOLLER) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at 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 at September 2020 Empresa Constructora Moller y Pérez Cotapos had debt of CL$242.4b, up from CL$216.2b in one year. However, because it has a cash reserve of CL$14.8b, its net debt is less, at about CL$227.6b.

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

We can see from the most recent balance sheet that Empresa Constructora Moller y Pérez Cotapos had liabilities of CL$259.1b falling due within a year, and liabilities of CL$87.1b due beyond that. On the other hand, it had cash of CL$14.8b and CL$75.5b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CL$255.9b.

This deficit casts a shadow over the CL$82.8b company, like a colossus towering over mere mortals. 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 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).

Strangely Empresa Constructora Moller y Pérez Cotapos has a sky high EBITDA ratio of 32.4, implying high debt, but a strong interest coverage of 23.3. This means that unless the company has access to very cheap debt, that interest expense will likely grow in the future. Importantly, Empresa Constructora Moller y Pérez Cotapos's EBIT fell a jaw-dropping 46% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Empresa Constructora Moller y Pérez Cotapos 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Empresa Constructora Moller y Pérez Cotapos saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

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. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. Considering all the factors previously mentioned, we think that Empresa Constructora Moller y Pérez Cotapos really is carrying too much debt. To our minds, that means the stock is rather high risk, and probably one to avoid; but to each their own (investing) style. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Empresa Constructora Moller y Pérez Cotapos (1 is concerning) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

If you’re looking to trade Empresa Constructora Moller y Pérez Cotapos, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.