Is Electrolux de Chile (SNSE:ELUXSA) Using Debt In A Risky Way?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Electrolux de Chile S.A. (SNSE:ELUXSA) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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. 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?

The image below, which you can click on for greater detail, shows that at September 2020 Electrolux de Chile had debt of CL$12.0b, up from CL$3.05b in one year. However, it does have CL$37.7b in cash offsetting this, leading to net cash of CL$25.7b.

How Strong 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. Offsetting these obligations, it had cash of CL$37.7b as well as receivables valued at CL$18.7b due within 12 months. So it has liabilities totalling CL$10.8b more than its cash and near-term receivables, combined.

Of course, Electrolux de Chile has a market capitalization of CL$283.9b, so these liabilities are probably manageable. 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! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Electrolux de Chile will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Electrolux de Chile made a loss at the EBIT level, and saw its revenue drop to CL$140b, which is a fall of 19%. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Electrolux de Chile (of which 1 is concerning!) 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.

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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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