Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies ENCE Energía y Celulosa, S.A. (BME:ENC) makes use of debt. But the more important question is: how much risk is that debt creating?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is ENCE Energía y Celulosa's Debt?
As you can see below, ENCE Energía y Celulosa had €699.9m of debt at March 2021, down from €769.0m a year prior. On the flip side, it has €475.3m in cash leading to net debt of about €224.6m.
How Healthy Is ENCE Energía y Celulosa's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that ENCE Energía y Celulosa had liabilities of €402.9m due within 12 months and liabilities of €698.4m due beyond that. Offsetting these obligations, it had cash of €475.3m as well as receivables valued at €75.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €550.2m.
This deficit is considerable relative to its market capitalization of €860.8m, so it does suggest shareholders should keep an eye on ENCE Energía y Celulosa's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine ENCE Energía y Celulosa's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year ENCE Energía y Celulosa had a loss before interest and tax, and actually shrunk its revenue by 5.8%, to €693m. We would much prefer see growth.
Importantly, ENCE Energía y Celulosa had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at €39m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through €68m of cash over the last year. So suffice it to say we consider the stock very risky. 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 1 warning sign for ENCE Energía y Celulosa you should be aware of.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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