Is Blumar (SNSE:BLUMAR) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Blumar S.A. (SNSE:BLUMAR) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Blumar

What Is Blumar's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Blumar had US$320.2m of debt, an increase on US$270.3m, over one year. However, because it has a cash reserve of US$43.8m, its net debt is less, at about US$276.3m.

How Healthy Is Blumar's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Blumar had liabilities of US$270.6m due within 12 months and liabilities of US$256.8m due beyond that. Offsetting these obligations, it had cash of US$43.8m as well as receivables valued at US$77.8m due within 12 months. So it has liabilities totalling US$405.8m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$438.6m, so it does suggest shareholders should keep an eye on Blumar's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Blumar 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, Blumar reported revenue of US$448m, which is a gain of 5.4%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Blumar produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$48m 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. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$26m in negative free cash flow over the last twelve months. So in short it's a really risky stock. 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. To that end, you should learn about the 3 warning signs we've spotted with Blumar (including 2 which make us uncomfortable) .

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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