Is Inmobiliaria Manquehue (SNSE:MANQUEHUE) Weighed On By Its Debt Load?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Inmobiliaria Manquehue S.A. (SNSE:MANQUEHUE) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Inmobiliaria Manquehue

What Is Inmobiliaria Manquehue's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Inmobiliaria Manquehue had CL$72.2b of debt in March 2021, down from CL$79.4b, one year before. However, it does have CL$24.0b in cash offsetting this, leading to net debt of about CL$48.2b.

A Look At Inmobiliaria Manquehue's Liabilities

According to the last reported balance sheet, Inmobiliaria Manquehue had liabilities of CL$97.5b due within 12 months, and liabilities of CL$56.5b due beyond 12 months. Offsetting these obligations, it had cash of CL$24.0b as well as receivables valued at CL$25.3b due within 12 months. So it has liabilities totalling CL$104.7b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CL$48.7b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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 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.

In the last year Inmobiliaria Manquehue had a loss before interest and tax, and actually shrunk its revenue by 37%, to CL$36b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Inmobiliaria Manquehue's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CL$5.3b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CL$5.8b didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. Case in point: We've spotted 4 warning signs for Inmobiliaria Manquehue you should be aware of, and 1 of them is a bit concerning.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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