Compañía Industrial El Volcán (SNSE:VOLCAN) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Compañía Industrial El Volcán S.A. (SNSE:VOLCAN) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Compañía Industrial El Volcán

How Much Debt Does Compañía Industrial El Volcán Carry?

The image below, which you can click on for greater detail, shows that Compañía Industrial El Volcán had debt of CL$57.2b at the end of March 2021, a reduction from CL$62.5b over a year. However, it does have CL$82.6b in cash offsetting this, leading to net cash of CL$25.5b.

How Strong Is Compañía Industrial El Volcán's Balance Sheet?

According to the last reported balance sheet, Compañía Industrial El Volcán had liabilities of CL$29.2b due within 12 months, and liabilities of CL$70.5b due beyond 12 months. Offsetting these obligations, it had cash of CL$82.6b as well as receivables valued at CL$26.2b due within 12 months. So it can boast CL$9.05b more liquid assets than total liabilities.

This surplus suggests that Compañía Industrial El Volcán has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Compañía Industrial El Volcán has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Compañía Industrial El Volcán has boosted its EBIT by 95%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Compañía Industrial El Volcán can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Compañía Industrial El Volcán 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. In the last three years, Compañía Industrial El Volcán's free cash flow amounted to 27% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Compañía Industrial El Volcán has CL$25.5b in net cash and a decent-looking balance sheet. And we liked the look of last year's 95% year-on-year EBIT growth. So is Compañía Industrial El Volcán's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Compañía Industrial El Volcán , 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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