Is Cruzados SADP (SNSE:CRUZADOS) Using Debt Sensibly?

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.' 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 Cruzados SADP (SNSE:CRUZADOS) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Cruzados SADP

What Is Cruzados SADP's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Cruzados SADP had debt of CL$1.43b, up from CL$237.8m in one year. But it also has CL$5.72b in cash to offset that, meaning it has CL$4.29b net cash.

A Look At Cruzados SADP's Liabilities

Zooming in on the latest balance sheet data, we can see that Cruzados SADP had liabilities of CL$2.99b due within 12 months and liabilities of CL$5.65b due beyond that. Offsetting these obligations, it had cash of CL$5.72b as well as receivables valued at CL$2.88b due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that Cruzados SADP's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CL$11.0b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Cruzados SADP boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Cruzados SADP'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.

Over 12 months, Cruzados SADP made a loss at the EBIT level, and saw its revenue drop to CL$12b, which is a fall of 30%. To be frank that doesn't bode well.

So How Risky Is Cruzados SADP?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Cruzados SADP had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CL$1.9b and booked a CL$2.3b accounting loss. With only CL$4.29b on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Cruzados SADP that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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