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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Empresa Constructora Moller y Pérez Cotapos S.A. (SNSE:MOLLER) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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$5.96b at the end of September 2021, a reduction from CL$242.4b over a year. However, it does have CL$2.91b in cash offsetting this, leading to net debt of about CL$3.05b.

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

We can see from the most recent balance sheet that Empresa Constructora Moller y Pérez Cotapos had liabilities of CL$215.9b falling due within a year, and liabilities of CL$86.1b due beyond that. On the other hand, it had cash of CL$2.91b 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$223.6b.

This deficit casts a shadow over the CL$38.5b 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 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Looking at its net debt to EBITDA of 0.49 and interest cover of 3.0 times, it seems to us that Empresa Constructora Moller y Pérez Cotapos is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Sadly, Empresa Constructora Moller y Pérez Cotapos's EBIT actually dropped 9.1% in the last year. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Empresa Constructora Moller y Pérez Cotapos burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

On the face of it, Empresa Constructora Moller y Pérez Cotapos's conversion of EBIT to free cash flow 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 managing its debt, based on its EBITDA,; that's encouraging. After considering the datapoints discussed, we think Empresa Constructora Moller y Pérez Cotapos has too much debt. That sort of riskiness is ok for some, but it certainly doesn't float our boat. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Empresa Constructora Moller y Pérez Cotapos (of which 1 makes us a bit uncomfortable!) you should know about.

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.

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.

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