Does Sociedad Agrícola La Rosa Sofruco (SNSE:SOFRUCO) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Sociedad Agrícola La Rosa Sofruco S.A. (SNSE:SOFRUCO) makes use of debt. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Sociedad Agrícola La Rosa Sofruco

What Is Sociedad Agrícola La Rosa Sofruco's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Sociedad Agrícola La Rosa Sofruco had CL$34.0b of debt in September 2020, down from CL$37.3b, one year before. However, it does have CL$4.89b in cash offsetting this, leading to net debt of about CL$29.1b.

How Healthy Is Sociedad Agrícola La Rosa Sofruco's Balance Sheet?

The latest balance sheet data shows that Sociedad Agrícola La Rosa Sofruco had liabilities of CL$28.0b due within a year, and liabilities of CL$19.3b falling due after that. Offsetting this, it had CL$4.89b in cash and CL$7.94b in receivables that were due within 12 months. So its liabilities total CL$34.4b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CL$22.0b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Sociedad Agrícola La Rosa Sofruco would probably need a major re-capitalization if its creditors were to demand repayment.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Sociedad Agrícola La Rosa Sofruco has a debt to EBITDA ratio of 2.5 and its EBIT covered its interest expense 5.8 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. Notably, Sociedad Agrícola La Rosa Sofruco's EBIT launched higher than Elon Musk, gaining a whopping 231% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Sociedad Agrícola La Rosa Sofruco'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Sociedad Agrícola La Rosa Sofruco recorded free cash flow worth a fulsome 84% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

Sociedad Agrícola La Rosa Sofruco's conversion of EBIT to free cash flow was a real positive on this analysis, as was its EBIT growth rate. But truth be told its level of total liabilities had us nibbling our nails. Looking at all this data makes us feel a little cautious about Sociedad Agrícola La Rosa Sofruco's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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 Sociedad Agrícola La Rosa Sofruco , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

If you’re looking to trade Sociedad Agrícola La Rosa Sofruco, 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.