Engie Energia Chile (SNSE:ECL) Takes On Some Risk With Its Use Of Debt

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.' 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. Importantly, Engie Energia Chile S.A. (SNSE:ECL) does carry debt. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Engie Energia Chile Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Engie Energia Chile had US$2.29b of debt, an increase on US$2.10b, over one year. However, because it has a cash reserve of US$348.3m, its net debt is less, at about US$1.94b.

How Healthy Is Engie Energia Chile's Balance Sheet?

The latest balance sheet data shows that Engie Energia Chile had liabilities of US$544.2m due within a year, and liabilities of US$2.46b falling due after that. Offsetting this, it had US$348.3m in cash and US$403.1m in receivables that were due within 12 months. So it has liabilities totalling US$2.25b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$1.41b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Engie Energia Chile would probably need a major re-capitalization if its creditors were to demand repayment.

View our latest analysis for Engie Energia Chile

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With net debt to EBITDA of 3.7 Engie Energia Chile has a fairly noticeable amount of debt. But the high interest coverage of 8.4 suggests it can easily service that debt. Importantly, Engie Energia Chile grew its EBIT by 50% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Engie Energia Chile can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Engie Energia Chile saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

To be frank both Engie Energia Chile's level of total liabilities and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. But on the bright side, its EBIT growth rate is a good sign, and makes us more optimistic. We should also note that Electric Utilities industry companies like Engie Energia Chile commonly do use debt without problems. Overall, we think it's fair to say that Engie Energia Chile has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. 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. Case in point: We've spotted 3 warning signs for Engie Energia Chile you should be aware of, and 1 of them is a bit unpleasant.

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.