Is Melon (SNSE:MELON) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Melon S.A. (SNSE:MELON) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

Check out our latest analysis for Melon

What Is Melon's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Melon had debt of CL$114.2b, up from CL$57.8b in one year. However, it does have CL$52.6b in cash offsetting this, leading to net debt of about CL$61.7b.

How Healthy Is Melon's Balance Sheet?

We can see from the most recent balance sheet that Melon had liabilities of CL$47.8b falling due within a year, and liabilities of CL$132.3b due beyond that. Offsetting this, it had CL$52.6b in cash and CL$27.3b in receivables that were due within 12 months. So its liabilities total CL$100.2b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CL$111.8b, so it does suggest shareholders should keep an eye on Melon's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is Melon's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Melon's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Melon had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CL$14b. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CL$11b of cash over the last year. So in short it's a really risky stock. 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 Melon is showing 2 warning signs in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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