Is Empresas La Polar (SNSE:NUEVAPOLAR) A Risky Investment?

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. As with many other companies Empresas La Polar S.A. (SNSE:NUEVAPOLAR) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Empresas La Polar

What Is Empresas La Polar's Debt?

You can click the graphic below for the historical numbers, but it shows that Empresas La Polar had CL$36.4b of debt in June 2021, down from CL$66.6b, one year before. However, it does have CL$37.8b in cash offsetting this, leading to net cash of CL$1.45b.

A Look At Empresas La Polar's Liabilities

Zooming in on the latest balance sheet data, we can see that Empresas La Polar had liabilities of CL$101.0b due within 12 months and liabilities of CL$167.4b due beyond that. On the other hand, it had cash of CL$37.8b and CL$64.9b worth of receivables due within a year. So it has liabilities totalling CL$165.7b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CL$47.1b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Empresas La Polar would likely require a major re-capitalisation if it had to pay its creditors today. Empresas La Polar boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

We also note that Empresas La Polar improved its EBIT from a last year's loss to a positive CL$35b. There's no doubt that we learn most about debt from the balance sheet. But it is Empresas La Polar'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Empresas La Polar 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. Over the last year, Empresas La Polar actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Empresas La Polar does have more liabilities than liquid assets, it also has net cash of CL$1.45b. The cherry on top was that in converted 230% of that EBIT to free cash flow, bringing in CL$81b. So although we see some areas for improvement, we're not too worried about Empresas La Polar's balance sheet. 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. We've identified 2 warning signs with Empresas La Polar , and understanding them should be part of your investment process.

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.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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