Salmones Camanchaca (SNSE:SALMOCAM) Is Making Moderate Use Of Debt

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 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 Salmones Camanchaca S.A. (SNSE:SALMOCAM) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Salmones Camanchaca

How Much Debt Does Salmones Camanchaca Carry?

The image below, which you can click on for greater detail, shows that at June 2021 Salmones Camanchaca had debt of US$146.4m, up from US$107.5m in one year. On the flip side, it has US$10.5m in cash leading to net debt of about US$135.8m.

How Strong Is Salmones Camanchaca's Balance Sheet?

We can see from the most recent balance sheet that Salmones Camanchaca had liabilities of US$104.7m falling due within a year, and liabilities of US$103.0m due beyond that. On the other hand, it had cash of US$10.5m and US$62.9m worth of receivables due within a year. So its liabilities total US$134.2m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$195.6m, so it does suggest shareholders should keep an eye on Salmones Camanchaca's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 Salmones Camanchaca'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.

In the last year Salmones Camanchaca had a loss before interest and tax, and actually shrunk its revenue by 31%, to US$241m. To be frank that doesn't bode well.

Caveat Emptor

While Salmones Camanchaca's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable US$48m 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$41m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Salmones Camanchaca has 2 warning signs (and 1 which is significant) we think 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.

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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