Is Empresas La Polar (SNSE:NUEVAPOLAR) Using Debt In A Risky Way?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Empresas La Polar S.A. (SNSE:NUEVAPOLAR) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its 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$54.8b of debt in December 2020, down from CL$68.0b, one year before. However, it also had CL$49.2b in cash, and so its net debt is CL$5.59b.

How Healthy Is Empresas La Polar's Balance Sheet?

According to the last reported balance sheet, Empresas La Polar had liabilities of CL$107.9b due within 12 months, and liabilities of CL$175.7b due beyond 12 months. Offsetting these obligations, it had cash of CL$49.2b as well as receivables valued at CL$81.7b due within 12 months. So it has liabilities totalling CL$152.8b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CL$55.9b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Empresas La Polar would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Empresas La Polar'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, Empresas La Polar made a loss at the EBIT level, and saw its revenue drop to CL$319b, which is a fall of 8.9%. We would much prefer see growth.

Caveat Emptor

Importantly, Empresas La Polar had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CL$956m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of CL$8.1b in the last year. So while it's not wise to assume the company will fail, we do think it's risky. 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. For example - Empresas La Polar has 2 warning signs we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

When trading Empresas La Polar or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.