Sociedad Punta del Cobre (SNSE:PUCOBRE) Has A Pretty Healthy Balance Sheet

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 Sociedad Punta del Cobre S.A. (SNSE:PUCOBRE) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Sociedad Punta del Cobre

What Is Sociedad Punta del Cobre's Net Debt?

As you can see below, Sociedad Punta del Cobre had US$21.4m of debt at December 2020, down from US$22.6m a year prior. But on the other hand it also has US$71.4m in cash, leading to a US$50.0m net cash position.

A Look At Sociedad Punta del Cobre's Liabilities

According to the last reported balance sheet, Sociedad Punta del Cobre had liabilities of US$118.6m due within 12 months, and liabilities of US$73.9m due beyond 12 months. On the other hand, it had cash of US$71.4m and US$45.0m worth of receivables due within a year. So it has liabilities totalling US$76.1m more than its cash and near-term receivables, combined.

Of course, Sociedad Punta del Cobre has a market capitalization of US$1.15b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Sociedad Punta del Cobre boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Sociedad Punta del Cobre has boosted its EBIT by 72%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Sociedad Punta del Cobre'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Sociedad Punta del Cobre may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Sociedad Punta del Cobre recorded free cash flow of 21% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Sociedad Punta del Cobre has US$50.0m in net cash. And we liked the look of last year's 72% year-on-year EBIT growth. So we don't think Sociedad Punta del Cobre's use of debt is 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. Case in point: We've spotted 1 warning sign for Sociedad Punta del Cobre you should be aware of.

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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