Club Hipico de Santiago (SNSE:HIPICO) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Club Hipico de Santiago S.A. (SNSE:HIPICO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 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 Club Hipico de Santiago

How Much Debt Does Club Hipico de Santiago Carry?

As you can see below, at the end of September 2020, Club Hipico de Santiago had CL$2.70b of debt, up from CL$1.67b a year ago. Click the image for more detail. On the flip side, it has CL$1.93b in cash leading to net debt of about CL$775.2m.

How Healthy Is Club Hipico de Santiago's Balance Sheet?

We can see from the most recent balance sheet that Club Hipico de Santiago had liabilities of CL$4.68b falling due within a year, and liabilities of CL$10.5b due beyond that. Offsetting this, it had CL$1.93b in cash and CL$1.45b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CL$11.7b.

This deficit isn't so bad because Club Hipico de Santiago is worth CL$21.7b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Club Hipico de Santiago 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, Club Hipico de Santiago made a loss at the EBIT level, and saw its revenue drop to CL$7.7b, which is a fall of 36%. That makes us nervous, to say the least.

Caveat Emptor

While Club Hipico de Santiago's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CL$2.1b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CL$1.8b. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Club Hipico de Santiago has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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