Is Ripley (SNSE:RIPLEY) Using Debt Sensibly?

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, Ripley Corp S.A. (SNSE:RIPLEY) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Ripley

What Is Ripley's Debt?

As you can see below, at the end of September 2020, Ripley had CL$1.65t of debt, up from CL$1.51t a year ago. Click the image for more detail. However, it also had CL$669.3b in cash, and so its net debt is CL$978.7b.

How Strong Is Ripley's Balance Sheet?

We can see from the most recent balance sheet that Ripley had liabilities of CL$1.49t falling due within a year, and liabilities of CL$1.12t due beyond that. On the other hand, it had cash of CL$669.3b and CL$570.1b worth of receivables due within a year. So it has liabilities totalling CL$1.37t more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CL$422.7b 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. After all, Ripley would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Ripley's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Ripley made a loss at the EBIT level, and saw its revenue drop to CL$1.4t, which is a fall of 18%. That's not what we would hope to see.

Caveat Emptor

While Ripley'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$75b. 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$50b in the last year. So we think this stock is quite risky. We'd prefer to pass. 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 3 warning signs for Ripley (1 is a bit concerning) 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.

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