Is Navarino (SNSE:NAVARINO) Using Debt In A Risky Way?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Navarino S.A. (SNSE:NAVARINO) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Navarino

How Much Debt Does Navarino Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Navarino had CL$8.10b of debt, an increase on CL$6.26b, over one year. But it also has CL$51.9b in cash to offset that, meaning it has CL$43.8b net cash.

How Healthy Is Navarino's Balance Sheet?

According to the last reported balance sheet, Navarino had liabilities of CL$207.1m due within 12 months, and liabilities of CL$7.97b due beyond 12 months. On the other hand, it had cash of CL$51.9b and CL$739.6m worth of receivables due within a year. So it can boast CL$44.4b more liquid assets than total liabilities.

This surplus liquidity suggests that Navarino's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Navarino boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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. To be frank that doesn't bode well.

So How Risky Is Navarino?

Although Navarino had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CL$1.5b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Navarino , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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