Is Compañía Pesquera Camanchaca (SNSE:CAMANCHACA) Using Too Much Debt?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Compañía Pesquera Camanchaca S.A. (SNSE:CAMANCHACA) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for Compañía Pesquera Camanchaca

How Much Debt Does Compañía Pesquera Camanchaca Carry?

The image below, which you can click on for greater detail, shows that at September 2021 Compañía Pesquera Camanchaca had debt of US$215.1m, up from US$176.5m in one year. However, it does have US$49.2m in cash offsetting this, leading to net debt of about US$165.9m.

A Look At Compañía Pesquera Camanchaca's Liabilities

Zooming in on the latest balance sheet data, we can see that Compañía Pesquera Camanchaca had liabilities of US$214.6m due within 12 months and liabilities of US$137.4m due beyond that. Offsetting this, it had US$49.2m in cash and US$107.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$195.0m.

Given this deficit is actually higher than the company's market capitalization of US$170.4m, we think shareholders really should watch Compañía Pesquera Camanchaca'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. There's no doubt that we learn most about debt from the balance sheet. But it is Compañía Pesquera Camanchaca's earnings that will influence how the balance sheet holds up in the future. 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, Compañía Pesquera Camanchaca made a loss at the EBIT level, and saw its revenue drop to US$591m, which is a fall of 4.0%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Compañía Pesquera Camanchaca produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$14m. 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 had negative free cash flow of US$48m over the last twelve months. That means it's on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Compañía Pesquera Camanchaca (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.