Warren Buffett said: “Volatility is far from synonymous with risk”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is because too much debt can sink a business. Like many other companies Enel Americas SA (SNSE: ENELAM) uses debt. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we look at debt levels, we first consider both liquidity and debt levels.
Discover our latest analysis for Enel AmÃ©ricas
What is the net debt of Enel AmÃ©ricas?
You can click on the graph below for historical figures, but it shows that as of June 2021, Enel AmÃ©ricas had a debt of US $ 7.13 billion, an increase from US $ 6.25 billion. , over one year. However, he also had $ 1.60 billion in cash, so his net debt is $ 5.53 billion.
How strong is Enel AmÃ©ricas’ balance sheet?
We can see from the most recent balance sheet that Enel AmÃ©ricas had liabilities of US $ 6.98 billion maturing within one year and liabilities of US $ 12.2 billion maturing within one year. of the. In return, he had $ 1.60 billion in cash and $ 4.12 billion in receivables due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by US $ 13.4 billion.
When you consider that this deficiency exceeds the company’s massive US $ 12.9 billion market cap, you might well be inclined to take a close look at the balance sheet. Hypothetically, an extremely large dilution would be necessary if the company was forced to repay its debts by raising capital at the current share price.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Enel AmÃ©ricas’ net debt of 1.8 times EBITDA suggests a graceful use of debt. And the attractive interest coverage (EBIT of 7.1 times the interest costs) certainly does not do everything to dispel this impression. Unfortunately, Enel AmÃ©ricas’ EBIT actually fell 3.2% last year. If this earnings trend continues, its debt load will rise like the heart of a polar bear watching its only cub. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether Enel AmÃ©ricas can strengthen its balance sheet over time. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay its debts with paper profits; he needs hard cash. It is therefore worth checking to what extent this EBIT is supported by free cash flow. Over the past three years, Enel AmÃ©ricas’ free cash flow has been 26% of its EBIT, less than we expected. It’s not great when it comes to paying down debt.
Our point of view
We would go so far as to say that Enel AmÃ©ricas’ level of total liabilities was disappointing. But on the bright side, his interest coverage is a good sign and makes us more optimistic. It should also be noted that companies in the electric utility industry like Enel AmÃ©ricas generally use debt without a problem. Once we consider all of the above factors together, it seems to us that Enel AmÃ©ricas’ debt makes it a bit risky. Some people like this kind of risk, but we are aware of the potential pitfalls, so we would probably prefer him to carry less debt. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example – Enel AmÃ©ricas has 3 warning signs we think you should be aware.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in any of the stocks mentioned.
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