Is Empresas Iansa (SNSE:IANSA) Using Debt In A Risky Way?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Empresas Iansa S.A. (SNSE:IANSA) does carry debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Empresas Iansa

How Much Debt Does Empresas Iansa Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Empresas Iansa had debt of US$171.5m, up from US$156.9m in one year. However, because it has a cash reserve of US$30.4m, its net debt is less, at about US$141.1m.

A Look At Empresas Iansa's Liabilities

According to the last reported balance sheet, Empresas Iansa had liabilities of US$163.3m due within 12 months, and liabilities of US$104.0m due beyond 12 months. On the other hand, it had cash of US$30.4m and US$110.3m worth of receivables due within a year. So its liabilities total US$126.6m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$48.4m 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. After all, Empresas Iansa would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Empresas Iansa will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Empresas Iansa made a loss at the EBIT level, and saw its revenue drop to US$393m, which is a fall of 2.8%. We would much prefer see growth.

Caveat Emptor

Importantly, Empresas Iansa had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$9.2m. 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. Nevertheless, we would not bet on it given that it lost US$15m in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Empresas Iansa you should be aware of, and 2 of them are a bit concerning.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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