Compañía Pesquera Camanchaca (SNSE:CAMANCHACA) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, '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 Compañía Pesquera Camanchaca S.A. (SNSE:CAMANCHACA) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Compañía Pesquera Camanchaca

What Is Compañía Pesquera Camanchaca's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Compañía Pesquera Camanchaca had debt of US$176.5m, up from US$148.0m in one year. On the flip side, it has US$63.7m in cash leading to net debt of about US$112.8m.

How Strong Is Compañía Pesquera Camanchaca's Balance Sheet?

According to the last reported balance sheet, Compañía Pesquera Camanchaca had liabilities of US$154.1m due within 12 months, and liabilities of US$145.9m due beyond 12 months. On the other hand, it had cash of US$63.7m and US$71.2m worth of receivables due within a year. So its liabilities total US$165.1m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Compañía Pesquera Camanchaca has a market capitalization of US$380.7m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While Compañía Pesquera Camanchaca has a quite reasonable net debt to EBITDA multiple of 2.0, its interest cover seems weak, at 1.3. In large part that's it has so much depreciation and amortisation. While companies often boast that these charges are non-cash, most such businesses will therefore require ongoing investment (that is not expensed.) Either way there's no doubt the stock is using meaningful leverage. Importantly, Compañía Pesquera Camanchaca's EBIT fell a jaw-dropping 93% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Compañía Pesquera Camanchaca'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. Considering the last two years, Compañía Pesquera Camanchaca actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Our View

To be frank both Compañía Pesquera Camanchaca's interest cover and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. Having said that, its ability handle its debt, based on its EBITDA, isn't such a worry. We're quite clear that we consider Compañía Pesquera Camanchaca to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Compañía Pesquera Camanchaca that you should be aware of before investing here.

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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