Health Check: How Prudently Does Electrolux de Chile (SNSE:ELUXSA) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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 note that Electrolux de Chile S.A. (SNSE:ELUXSA) does have debt on its balance sheet. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Electrolux de Chile

How Much Debt Does Electrolux de Chile Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Electrolux de Chile had CL$12.0b of debt, an increase on CL$3.05b, over one year. But it also has CL$37.7b in cash to offset that, meaning it has CL$25.7b net cash.

How Healthy Is Electrolux de Chile's Balance Sheet?

According to the last reported balance sheet, Electrolux de Chile had liabilities of CL$58.9b due within 12 months, and liabilities of CL$8.25b due beyond 12 months. On the other hand, it had cash of CL$37.7b and CL$18.7b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CL$10.8b.

Since publicly traded Electrolux de Chile shares are worth a total of CL$283.9b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Electrolux de Chile 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 you can't view debt in total isolation; since Electrolux de Chile will need earnings to service that debt. 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 Electrolux de Chile had a loss before interest and tax, and actually shrunk its revenue by 19%, to CL$140b. That's not what we would hope to see.

So How Risky Is Electrolux de Chile?

Although Electrolux de Chile had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CL$18b. 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 revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. Like risks, for instance. Every company has them, and we've spotted 2 warning signs for Electrolux de Chile (of which 1 is a bit unpleasant!) you should know about.

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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