Does Viña Concha y Toro (SNSE:CONCHATORO) Have A Healthy Balance Sheet?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that Viña Concha y Toro S.A. (SNSE:CONCHATORO) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Viña Concha y Toro

What Is Viña Concha y Toro's Net Debt?

As you can see below, Viña Concha y Toro had CL$359.5b of debt at September 2020, down from CL$380.0b a year prior. However, it also had CL$62.9b in cash, and so its net debt is CL$296.6b.

A Look At Viña Concha y Toro's Liabilities

We can see from the most recent balance sheet that Viña Concha y Toro had liabilities of CL$293.4b falling due within a year, and liabilities of CL$366.4b due beyond that. Offsetting this, it had CL$62.9b in cash and CL$205.4b in receivables that were due within 12 months. So it has liabilities totalling CL$391.5b more than its cash and near-term receivables, combined.

Viña Concha y Toro has a market capitalization of CL$867.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Viña Concha y Toro's net debt to EBITDA ratio of about 2.1 suggests only moderate use of debt. And its strong interest cover of 13.3 times, makes us even more comfortable. Importantly, Viña Concha y Toro grew its EBIT by 63% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Viña Concha y Toro's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Viña Concha y Toro recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Viña Concha y Toro's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. All these things considered, it appears that Viña Concha y Toro can comfortably handle its current debt levels. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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. For example, we've discovered 1 warning sign for Viña Concha y Toro that you should be aware of before investing here.

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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