We Think Empresa Nacional de Telecomunicaciones (SNSE:ENTEL) Is Taking Some Risk With Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Empresa Nacional de Telecomunicaciones S.A. (SNSE:ENTEL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Empresa Nacional de Telecomunicaciones

How Much Debt Does Empresa Nacional de Telecomunicaciones Carry?

The image below, which you can click on for greater detail, shows that at March 2022 Empresa Nacional de Telecomunicaciones had debt of CL$2.14t, up from CL$1.91t in one year. However, it also had CL$330.9b in cash, and so its net debt is CL$1.80t.

How Strong Is Empresa Nacional de Telecomunicaciones' Balance Sheet?

We can see from the most recent balance sheet that Empresa Nacional de Telecomunicaciones had liabilities of CL$1.19t falling due within a year, and liabilities of CL$2.70t due beyond that. Offsetting these obligations, it had cash of CL$330.9b as well as receivables valued at CL$641.6b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CL$2.92t.

This deficit casts a shadow over the CL$874.9b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Empresa Nacional de Telecomunicaciones would likely require a major re-capitalisation if it had to pay its creditors today.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Empresa Nacional de Telecomunicaciones has a debt to EBITDA ratio of 2.7 and its EBIT covered its interest expense 3.4 times. Taken together this implies that, while we wouldn't want to see debt levels rise, we think it can handle its current leverage. The good news is that Empresa Nacional de Telecomunicaciones grew its EBIT a smooth 56% over the last twelve months. Like the milk of human kindness that sort of growth increases resilience, making the company more capable of managing debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Empresa Nacional de Telecomunicaciones'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Empresa Nacional de Telecomunicaciones produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Our View

We feel some trepidation about Empresa Nacional de Telecomunicaciones's difficulty level of total liabilities, but we've got positives to focus on, too. To wit both its EBIT growth rate and conversion of EBIT to free cash flow were encouraging signs. We think that Empresa Nacional de Telecomunicaciones's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Empresa Nacional de Telecomunicaciones , 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.

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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.