Yahoo Finance Sociedad Química y Minera de Chile (NYSE:SQM) Could Easily Take On More Debt
Warren Buffett famously said, '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. Importantly, Sociedad Química y Minera de Chile S.A. (NYSE:SQM) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Sociedad Química y Minera de Chile
What Is Sociedad Química y Minera de Chile's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2022 Sociedad Química y Minera de Chile had US$2.62b of debt, an increase on US$1.94b, over one year. However, it does have US$3.29b in cash offsetting this, leading to net cash of US$670.5m.
How Healthy Is Sociedad Química y Minera de Chile's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Sociedad Química y Minera de Chile had liabilities of US$2.49b due within 12 months and liabilities of US$2.77b due beyond that. Offsetting these obligations, it had cash of US$3.29b as well as receivables valued at US$1.19b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$780.4m.
Given Sociedad Química y Minera de Chile has a humongous market capitalization of US$27.4b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Sociedad Química y Minera de Chile boasts net cash, so it's fair to say it does not have a heavy debt load!
Even more impressive was the fact that Sociedad Química y Minera de Chile grew its EBIT by 391% over twelve months. 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 ultimately the future profitability of the business will decide if Sociedad Química y Minera de Chile 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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Sociedad Química y Minera de Chile may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Sociedad Química y Minera de Chile recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing up
We could understand if investors are concerned about Sociedad Química y Minera de Chile's liabilities, but we can be reassured by the fact it has has net cash of US$670.5m. And it impressed us with its EBIT growth of 391% over the last year. So is Sociedad Química y Minera de Chile's debt a risk? It doesn't seem so to us. 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. We've identified 4 warning signs with Sociedad Química y Minera de Chile (at least 1 which is concerning) , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
