Health Check: How Prudently Does Empresa Pesquera Eperva (SNSE:EPERVA) Use 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. As with many other companies Empresa Pesquera Eperva S.A. (SNSE:EPERVA) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Empresa Pesquera Eperva

What Is Empresa Pesquera Eperva's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Empresa Pesquera Eperva had US$371.5m of debt, an increase on US$342.2m, over one year. However, because it has a cash reserve of US$89.5m, its net debt is less, at about US$282.0m.

How Healthy Is Empresa Pesquera Eperva's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Empresa Pesquera Eperva had liabilities of US$356.0m due within 12 months and liabilities of US$69.5m due beyond that. On the other hand, it had cash of US$89.5m and US$104.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$231.7m.

The deficiency here weighs heavily on the US$60.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Empresa Pesquera Eperva would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Empresa Pesquera Eperva 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 Empresa Pesquera Eperva wasn't profitable at an EBIT level, but managed to grow its revenue by 2.1%, to US$347m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Empresa Pesquera Eperva had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$12m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized US$6.3m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. 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 Empresa Pesquera Eperva that you should be aware of before investing here.

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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