Is Unión El Golf (SNSE:UNION GOLF) 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.' 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. We can see that Unión El Golf S.A. (SNSE:UNION GOLF) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Unión El Golf

How Much Debt Does Unión El Golf Carry?

The image below, which you can click on for greater detail, shows that at December 2020 Unión El Golf had debt of CL$4.40b, up from CL$3.69b in one year. However, it does have CL$248.0m in cash offsetting this, leading to net debt of about CL$4.15b.

How Healthy Is Unión El Golf's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Unión El Golf had liabilities of CL$510.9m due within 12 months and liabilities of CL$7.71b due beyond that. Offsetting this, it had CL$248.0m in cash and CL$114.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CL$7.86b.

Given this deficit is actually higher than the company's market capitalization of CL$6.26b, we think shareholders really should watch Unión El Golf'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. 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 Unión El Golf will need earnings to service that debt. 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, Unión El Golf made a loss at the EBIT level, and saw its revenue drop to CL$584m, which is a fall of 75%. That makes us nervous, to say the least.

Caveat Emptor

While Unión El Golf'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 a very considerable CL$1.1b at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CL$830m in negative free cash flow over the last year. That means it's on the risky side of things. 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. We've identified 3 warning signs with Unión El Golf , and understanding them should be part of your investment process.

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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