Is Inmobiliaria Manquehue (SNSE:MANQUEHUE) 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.' 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. Importantly, Inmobiliaria Manquehue S.A. (SNSE:MANQUEHUE) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Inmobiliaria Manquehue

How Much Debt Does Inmobiliaria Manquehue Carry?

The image below, which you can click on for greater detail, shows that at September 2021 Inmobiliaria Manquehue had debt of CL$85.4b, up from CL$67.5b in one year. However, it also had CL$21.3b in cash, and so its net debt is CL$64.1b.

A Look At Inmobiliaria Manquehue's Liabilities

Zooming in on the latest balance sheet data, we can see that Inmobiliaria Manquehue had liabilities of CL$104.9b due within 12 months and liabilities of CL$54.8b due beyond that. Offsetting this, it had CL$21.3b in cash and CL$28.3b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CL$110.1b.

This deficit casts a shadow over the CL$37.7b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Inmobiliaria Manquehue would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Inmobiliaria Manquehue'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.

Over 12 months, Inmobiliaria Manquehue made a loss at the EBIT level, and saw its revenue drop to CL$36b, which is a fall of 33%. That makes us nervous, to say the least.

Caveat Emptor

While Inmobiliaria Manquehue's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CL$4.5b. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized CL$1.9b in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we consider this a high risk stock and we wouldn't be at all surprised if the company asks shareholders for money before long. 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 Inmobiliaria Manquehue (of which 1 can't be ignored!) 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. 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.