Is Naturgy Chile Gas Natural (SNSE:NTGCLGAS) A Risky Investment?

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. As with many other companies Naturgy Chile Gas Natural S.A. (SNSE:NTGCLGAS) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Naturgy Chile Gas Natural

What Is Naturgy Chile Gas Natural's Debt?

The image below, which you can click on for greater detail, shows that Naturgy Chile Gas Natural had debt of CL$462.7b at the end of September 2023, a reduction from CL$528.7b over a year. However, it does have CL$294.2b in cash offsetting this, leading to net debt of about CL$168.5b.

How Strong Is Naturgy Chile Gas Natural's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Naturgy Chile Gas Natural had liabilities of CL$187.6b due within 12 months and liabilities of CL$1.08t due beyond that. Offsetting these obligations, it had cash of CL$294.2b as well as receivables valued at CL$134.7b due within 12 months. So it has liabilities totalling CL$841.6b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CL$525.6b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Naturgy Chile Gas Natural would likely require a major re-capitalisation if it had to pay its creditors today.

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.

Naturgy Chile Gas Natural's net debt is only 0.59 times its EBITDA. And its EBIT covers its interest expense a whopping 51.2 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Better yet, Naturgy Chile Gas Natural grew its EBIT by 179% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Naturgy Chile Gas Natural will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Happily for any shareholders, Naturgy Chile Gas Natural actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

The good news is that Naturgy Chile Gas Natural's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But the stark truth is that we are concerned by its level of total liabilities. We would also note that Gas Utilities industry companies like Naturgy Chile Gas Natural commonly do use debt without problems. All these things considered, it appears that Naturgy Chile Gas Natural can comfortably handle its current debt levels. On the plus side, this leverage can boost shareholder returns, but the potential downside is more risk of loss, so it's worth monitoring the balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Naturgy Chile Gas Natural has 3 warning signs (and 2 which are significant) we think 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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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.