We Think Empresas AquaChile (SNSE:AQUACHILE) Has A Fair Chunk Of Debt

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. As with many other companies Empresas AquaChile S.A. (SNSE:AQUACHILE) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 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.

View our latest analysis for Empresas AquaChile

What Is Empresas AquaChile's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Empresas AquaChile had debt of US$308.5m, up from US$70.2m in one year. However, it also had US$16.4m in cash, and so its net debt is US$292.0m.

How Healthy Is Empresas AquaChile's Balance Sheet?

The latest balance sheet data shows that Empresas AquaChile had liabilities of US$231.8m due within a year, and liabilities of US$275.9m falling due after that. Offsetting this, it had US$16.4m in cash and US$160.5m in receivables that were due within 12 months. So its liabilities total US$330.7m more than the combination of its cash and short-term receivables.

Empresas AquaChile has a market capitalization of US$1.05b, so it could very likely raise cash to ameliorate 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. 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 Empresas AquaChile 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.

In the last year Empresas AquaChile wasn't profitable at an EBIT level, but managed to grow its revenue by 21%, to US$1.2b. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Empresas AquaChile managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost a very considerable US$259m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$124m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Empresas AquaChile's profit, revenue, and operating cashflow have changed over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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