Is Empresa Pesquera Eperva (SNSE:EPERVA) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Empresa Pesquera Eperva S.A. (SNSE:EPERVA) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Empresa Pesquera Eperva

What Is Empresa Pesquera Eperva's Net Debt?

As you can see below, Empresa Pesquera Eperva had US$371.6m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$46.7m in cash offsetting this, leading to net debt of about US$324.9m.

How Healthy Is Empresa Pesquera Eperva's Balance Sheet?

According to the last reported balance sheet, Empresa Pesquera Eperva had liabilities of US$351.8m due within 12 months, and liabilities of US$62.4m due beyond 12 months. Offsetting this, it had US$46.7m in cash and US$107.0m in receivables that were due within 12 months. So its liabilities total US$260.5m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$64.5m 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'd watch its balance sheet closely, without a doubt. At the end of the day, Empresa Pesquera Eperva would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Empresa Pesquera Eperva'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.

In the last year Empresa Pesquera Eperva wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to US$354m. 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$34m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of US$9.0m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Empresa Pesquera Eperva you should know about.

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.

If you’re looking to trade Empresa Pesquera Eperva, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.