Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Multiexport Foods S.A. (SNSE:MULTIFOODS) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
Check out our latest analysis for Multiexport Foods
How Much Debt Does Multiexport Foods Carry?
The image below, which you can click on for greater detail, shows that at June 2021 Multiexport Foods had debt of US$215.1m, up from US$152.3m in one year. However, it does have US$22.0m in cash offsetting this, leading to net debt of about US$193.1m.
How Strong Is Multiexport Foods' Balance Sheet?
We can see from the most recent balance sheet that Multiexport Foods had liabilities of US$179.9m falling due within a year, and liabilities of US$185.7m due beyond that. On the other hand, it had cash of US$22.0m and US$73.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$270.0m.
This is a mountain of leverage relative to its market capitalization of US$443.4m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Multiexport Foods's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Multiexport Foods saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.
Caveat Emptor
Importantly, Multiexport Foods had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable US$80m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled US$49m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. Be aware that Multiexport Foods is showing 2 warning signs in our investment analysis , you should know about...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
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About SNSE:MULTI X
Multiexport Foods
Provides seafood products in Chile and internationally.
Slightly overvalued with imperfect balance sheet.
