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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Empresa Constructora Moller y Pérez Cotapos S.A. (SNSE:MOLLER) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Empresa Constructora Moller y Pérez Cotapos

What Is Empresa Constructora Moller y Pérez Cotapos's Debt?

As you can see below, Empresa Constructora Moller y Pérez Cotapos had CL$237.1b of debt at March 2021, down from CL$248.9b a year prior. However, because it has a cash reserve of CL$8.50b, its net debt is less, at about CL$228.6b.

How Strong 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$238.8b due within a year, and liabilities of CL$101.2b falling due after that. Offsetting these obligations, it had cash of CL$8.50b as well as receivables valued at CL$78.1b due within 12 months. So its liabilities total CL$253.4b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CL$66.3b 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Strangely Empresa Constructora Moller y Pérez Cotapos has a sky high EBITDA ratio of 54.0, implying high debt, but a strong interest coverage of 28.1. 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 61% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Empresa Constructora Moller y Pérez Cotapos's earnings that will influence how the balance sheet holds up in the future. 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 we always check how much of that EBIT is translated into 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

To be frank both Empresa Constructora Moller y Pérez Cotapos's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at covering its interest expense with its EBIT; that's encouraging. We think the chances that Empresa Constructora Moller y Pérez Cotapos has too much debt a very significant. To us, that makes the stock rather risky, like walking through a dog park with your eyes closed. But some investors may feel differently. 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. We've identified 6 warning signs with Empresa Constructora Moller y Pérez Cotapos (at least 2 which make us uncomfortable) , and understanding them should be part of your investment process.

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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