We Think Cemento Polpaico (SNSE:POLPAICO) Has A Fair Chunk 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.' 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. Importantly, Cemento Polpaico S.A. (SNSE:POLPAICO) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Cemento Polpaico

What Is Cemento Polpaico's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Cemento Polpaico had debt of CL$166.4b, up from CL$23.6b in one year. However, it does have CL$42.8b in cash offsetting this, leading to net debt of about CL$123.5b.

How Healthy Is Cemento Polpaico's Balance Sheet?

The latest balance sheet data shows that Cemento Polpaico had liabilities of CL$76.9b due within a year, and liabilities of CL$143.8b falling due after that. On the other hand, it had cash of CL$42.8b and CL$37.2b worth of receivables due within a year. So its liabilities total CL$140.8b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CL$205.2b, so it does suggest shareholders should keep an eye on Cemento Polpaico's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Cemento Polpaico 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.

In the last year Cemento Polpaico's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

Caveat Emptor

Importantly, Cemento Polpaico had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CL$5.4b 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CL$8.4b in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Cemento Polpaico (at least 2 which are concerning) , 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.

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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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