These 4 Measures Indicate That Sociedad Agrícola La Rosa Sofruco (SNSE:SOFRUCO) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Sociedad Agrícola La Rosa Sofruco

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

As you can see below, Sociedad Agrícola La Rosa Sofruco had CL$29.6b of debt at December 2020, down from CL$34.1b a year prior. However, it does have CL$5.63b in cash offsetting this, leading to net debt of about CL$23.9b.

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

We can see from the most recent balance sheet that Sociedad Agrícola La Rosa Sofruco had liabilities of CL$25.4b falling due within a year, and liabilities of CL$17.5b due beyond that. Offsetting this, it had CL$5.63b in cash and CL$4.72b in receivables that were due within 12 months. So its liabilities total CL$32.6b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CL$22.0b, we think shareholders really should watch Sociedad Agrícola La Rosa Sofruco's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Sociedad Agrícola La Rosa Sofruco's net debt of 2.4 times EBITDA suggests graceful use of debt. And the alluring interest cover (EBIT of 7.4 times interest expense) certainly does not do anything to dispel this impression. Notably, Sociedad Agrícola La Rosa Sofruco's EBIT launched higher than Elon Musk, gaining a whopping 190% on last year. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Sociedad Agrícola La Rosa Sofruco will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Sociedad Agrícola La Rosa Sofruco generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

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 debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more 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. For example - Sociedad Agrícola La Rosa Sofruco has 3 warning signs we think you should be aware of.

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. 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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