Does Navarino (SNSE:NAVARINO) Have A Healthy Balance Sheet?

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.' 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. We can see that Navarino S.A. (SNSE:NAVARINO) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Navarino

What Is Navarino's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Navarino had debt of CL$8.10b, up from CL$6.26b in one year. However, its balance sheet shows it holds CL$51.9b in cash, so it actually has CL$43.8b net cash.

How Healthy Is Navarino's Balance Sheet?

The latest balance sheet data shows that Navarino had liabilities of CL$207.1m due within a year, and liabilities of CL$7.97b falling due after that. Offsetting these obligations, it had cash of CL$51.9b as well as receivables valued at CL$739.6m due within 12 months. So it can boast CL$44.4b more liquid assets than total liabilities.

This excess liquidity is a great indication that Navarino's balance sheet is just as strong as racists are weak. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Navarino has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Navarino'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.

In the last year Navarino had a loss before interest and tax, and actually shrunk its revenue by 49%, to CL$3.4m. That makes us nervous, to say the least.

So How Risky Is Navarino?

While Navarino lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CL$1.5b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 1 warning sign for Navarino that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.
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