Is Empresas La Polar (SNSE:NUEVAPOLAR) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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, Empresas La Polar S.A. (SNSE:NUEVAPOLAR) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Empresas La Polar

What Is Empresas La Polar's Debt?

As you can see below, Empresas La Polar had CL$64.4b of debt at September 2020, down from CL$67.5b a year prior. On the flip side, it has CL$33.8b in cash leading to net debt of about CL$30.5b.

How Strong Is Empresas La Polar's Balance Sheet?

We can see from the most recent balance sheet that Empresas La Polar had liabilities of CL$111.4b falling due within a year, and liabilities of CL$157.5b due beyond that. Offsetting this, it had CL$33.8b in cash and CL$56.4b in receivables that were due within 12 months. So its liabilities total CL$178.7b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CL$32.5b 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 definitely think shareholders need to watch this one closely. At the end of the day, Empresas La Polar would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Empresas La Polar made a loss at the EBIT level, and saw its revenue drop to CL$297b, which is a fall of 18%. That's not what we would hope to see.

Caveat Emptor

While Empresas La Polar's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CL$22b. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. 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$13b in the last year. So we think this stock is quite risky. We'd prefer to pass. 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. Consider risks, for instance. Every company has them, and we've spotted 1 warning sign for Empresas La Polar you should know about.

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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