Unión El Golf (SNSE:UNION GOLF) Has Debt But No Earnings; Should You Worry?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Unión El Golf S.A. (SNSE:UNION GOLF) does carry debt. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Unión El Golf

What Is Unión El Golf's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Unión El Golf had debt of CL$4.28b, up from CL$3.55b in one year. However, it also had CL$369.6m in cash, and so its net debt is CL$3.91b.

How Healthy Is Unión El Golf's Balance Sheet?

According to the last reported balance sheet, Unión El Golf had liabilities of CL$646.2m due within 12 months, and liabilities of CL$7.43b due beyond 12 months. Offsetting these obligations, it had cash of CL$369.6m as well as receivables valued at CL$123.4m due within 12 months. So its liabilities total CL$7.59b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CL$6.26b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Unión El Golf's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Unión El Golf made a loss at the EBIT level, and saw its revenue drop to CL$1.0b, which is a fall of 58%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Unión El Golf's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CL$922m at the EBIT level. 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. Not least because it had negative free cash flow of CL$645m over the last twelve months. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Take risks, for example - Unión El Golf has 3 warning signs (and 2 which can't be ignored) we think you should know about.

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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