Would Salmones Camanchaca (SNSE:SALMOCAM) Be Better Off With Less 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.' 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 Salmones Camanchaca S.A. (SNSE:SALMOCAM) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Salmones Camanchaca had US$113.4m of debt, an increase on US$100.7m, over one year. However, because it has a cash reserve of US$7.62m, its net debt is less, at about US$105.8m.

How Healthy Is Salmones Camanchaca's Balance Sheet?

The latest balance sheet data shows that Salmones Camanchaca had liabilities of US$101.9m due within a year, and liabilities of US$100.3m falling due after that. On the other hand, it had cash of US$7.62m and US$59.0m worth of receivables due within a year. So it has liabilities totalling US$135.6m more than its cash and near-term receivables, combined.

Salmones Camanchaca has a market capitalization of US$391.4m, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Salmones Camanchaca can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Salmones Camanchaca reported revenue of US$329m, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Salmones Camanchaca had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$1.7m 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. For example, we would not want to see a repeat of last year's loss of US$8.0m. So we do think this stock is quite 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. Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Salmones Camanchaca , and understanding them should be part of your investment process.

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.

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