Does Cruzados SADP (SNSE: CRUZADOS) use debt wisely?


Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. We can see that Cruzados SADP (SNSE: CRUZADOS) uses debt in his business. But the most important question is: what risk does this debt create?

When is debt a problem?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. 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 look at cash and debt levels, together.

See our latest analysis for Cruzados SADP

What is the debt of Cruzados SADP?

The image below, which you can click for more details, shows that in September 2020, Cruzados SADP was in debt of CL $ 1.43 billion, compared to CL $ 237.8 million in one year. But he also has CL $ 5.72 billion in cash to make up for that, which means he has CL $ 4.29 billion in net cash.

SNSE: CRUZADOS History of debt on equity March 10, 2021

A look at the liabilities of Cruzados SADP

Zooming in on the latest balance sheet data, we can see that Cruzados SADP had liabilities of CL $ 2.99 billion due within 12 months and CL $ 5.65 billion liabilities beyond. In compensation for these obligations, it had cash of CL $ 5.72 billion as well as receivables valued at CL $ 2.88 billion due within 12 months. Thus, its total liabilities correspond more or less perfectly to its short-term liquid assets.

This state of affairs indicates that Cruzados SADP’s balance sheet looks quite strong, as its total liabilities are roughly equal to its liquid assets. So the $ 11.0 billion CL company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. Despite her notable liabilities, Cruzados SADP has a net cash flow, so it’s fair to say that she doesn’t have a heavy debt load! There is no doubt that we learn the most about debt from the balance sheet. But it is the profits of Cruzados SADP that will influence the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Over 12 months, Cruzados SADP recorded a loss in EBIT and saw its revenue drop to CL $ 12 billion, a decrease of 30%. To be frank, that doesn’t bode well.

So how risky is Cruzados SADP?

We are convinced that loss-making companies are, in general, riskier than profitable companies. And in the past year, Cruzados SADP has recorded a loss of profit before interest and taxes (EBIT), frankly. And during the same period, it recorded a negative free cash outflow of CL $ 1.9 billion and recorded a book loss of CL $ 2.3 billion. With only CL $ 4.29 billion on the balance sheet, it looks like it will soon have to raise capital again. In summary, we’re a little skeptical about this one, as it looks pretty risky in the absence of free cash flow. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. For example, we have identified 1 warning sign for Cruzados SADP that you need to be aware of.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, then feel free to find out. our exclusive list of cash net growth stocks, today.

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This Simply Wall St article is general in nature. 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 the mentioned stocks.
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