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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Empresa Nacional de Telecomunicaciones S.A. (SNSE:ENTEL) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out the opportunities and risks within the XX Wireless Telecom industry.

What Is Empresa Nacional de Telecomunicaciones's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Empresa Nacional de Telecomunicaciones had debt of CL$2.51t, up from CL$1.91t in one year. However, because it has a cash reserve of CL$439.9b, its net debt is less, at about CL$2.07t.

A Look At Empresa Nacional de Telecomunicaciones' Liabilities

According to the last reported balance sheet, Empresa Nacional de Telecomunicaciones had liabilities of CL$1.30t due within 12 months, and liabilities of CL$3.15t due beyond 12 months. Offsetting this, it had CL$439.9b in cash and CL$720.4b in receivables that were due within 12 months. So it has liabilities totalling CL$3.29t more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CL$820.9b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Empresa Nacional de Telecomunicaciones would probably need a major re-capitalization if its creditors were to demand repayment.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). 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 3.2 and its EBIT covered its interest expense 3.4 times. This suggests that while the debt levels are significant, we'd stop short of calling them problematic. However, one redeeming factor is that Empresa Nacional de Telecomunicaciones grew its EBIT at 16% over the last 12 months, boosting its ability to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Empresa Nacional de Telecomunicaciones can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Empresa Nacional de Telecomunicaciones produced sturdy free cash flow equating to 63% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

We'd go so far as to say Empresa Nacional de Telecomunicaciones's level of total liabilities was disappointing. But at least it's pretty decent at growing its EBIT; that's encouraging. Looking at the balance sheet and taking into account all these factors, we do believe that debt is making Empresa Nacional de Telecomunicaciones stock a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Empresa Nacional de Telecomunicaciones (2 are significant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.