Is Inmobiliaria Manquehue (SNSE:MANQUEHUE) Using Debt Sensibly?

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, Inmobiliaria Manquehue S.A. (SNSE:MANQUEHUE) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Inmobiliaria Manquehue

What Is Inmobiliaria Manquehue's Debt?

As you can see below, Inmobiliaria Manquehue had CL$67.5b of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of CL$19.8b, its net debt is less, at about CL$47.6b.

How Strong Is Inmobiliaria Manquehue's Balance Sheet?

We can see from the most recent balance sheet that Inmobiliaria Manquehue had liabilities of CL$81.5b falling due within a year, and liabilities of CL$58.9b due beyond that. Offsetting this, it had CL$19.8b in cash and CL$27.4b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CL$93.1b.

Given this deficit is actually higher than the company's market capitalization of CL$75.0b, we think shareholders really should watch Inmobiliaria Manquehue's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Inmobiliaria Manquehue 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, Inmobiliaria Manquehue made a loss at the EBIT level, and saw its revenue drop to CL$53b, which is a fall of 14%. We would much prefer see growth.

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. To be specific the EBIT loss came in at CL$2.3b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of CL$2.9b. And until that time we think this is a risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Inmobiliaria Manquehue , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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