Is ENCE Energía y Celulosa (BME:ENC) Weighed On By Its Debt Load?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies ENCE Energía y Celulosa, S.A. (BME:ENC) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for ENCE Energía y Celulosa

What Is ENCE Energía y Celulosa's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 ENCE Energía y Celulosa had debt of €874.0m, up from €683.8m in one year. However, because it has a cash reserve of €359.8m, its net debt is less, at about €514.2m.

How Strong Is ENCE Energía y Celulosa's Balance Sheet?

We can see from the most recent balance sheet that ENCE Energía y Celulosa had liabilities of €405.8m falling due within a year, and liabilities of €915.4m due beyond that. On the other hand, it had cash of €359.8m and €74.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €886.5m.

Given this deficit is actually higher than the company's market capitalization of €862.4m, we think shareholders really should watch ENCE Energía y Celulosa's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 ENCE Energía y Celulosa 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.

Over 12 months, ENCE Energía y Celulosa made a loss at the EBIT level, and saw its revenue drop to €692m, which is a fall of 13%. That's not what we would hope to see.

Caveat Emptor

While ENCE Energía y Celulosa's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost €38m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of €28m over the last twelve months. That means it's on the risky side of things. 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. For example, we've discovered 2 warning signs for ENCE Energía y Celulosa (1 is a bit unpleasant!) that you should be aware of before investing here.

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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