Is the Sociedad Química y Minera de Chile (NYSE: SQM) using too much debt?


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 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. We note that Sociedad Química y Minera de Chile SA (NYSE: SQM) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. 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.

Check out our latest review for Sociedad Química y Minera de Chile

What is the debt of the Sociedad Química y Minera de Chile?

As you can see below, the Sociedad Química y Minera de Chile had a debt of US $ 1.94 billion, as of June 2021, which is roughly the same as the year before. You can click on the graph for more details. But on the other hand, it also has $ 1.95 billion in cash, which leads to a net cash position of $ 5.10 million.

NYSE: SQM Debt to Equity History October 18, 2021

How healthy is the balance sheet of Sociedad Química y Minera de Chile?

Zooming in on the latest balance sheet data, we can see that the Sociedad Química y Minera de Chile had a liability of US $ 581.3 million due within 12 months and a liability of US $ 2.20 billion due. beyond. In compensation for these obligations, he had cash of US $ 1.95 billion as well as receivables valued at US $ 622.7 million due within 12 months. Its liabilities therefore total US $ 208.8 million more than the combination of its cash and short-term receivables.

Considering the size of Sociedad Química y Minera de Chile, it appears that its liquid assets are well balanced with its total liabilities. So the $ 15.5 billion company is highly unlikely to run out of cash, but it’s still worth keeping an eye on the balance sheet. Despite its notable liabilities, the Sociedad Química y Minera de Chile has a net cash position, so it’s fair to say that it doesn’t have a heavy debt load!

And we also warmly note that Sociedad Química y Minera de Chile increased its EBIT by 15% last year, which makes its debt more manageable. The balance sheet is clearly the area you need to focus on when analyzing debt. But it is future profits, more than anything, that will determine Sociedad Química y Minera de Chile’s ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. The Sociedad Química y Minera de Chile may have net cash on the balance sheet, but it’s always interesting to look at how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both his need for, and his ability to manage debt. Over the past three years, the Sociedad Química y Minera de Chile has generated free cash flow of 8.0% of its EBIT, a performance without interest. This low level of cash conversion undermines its ability to manage and repay its debts.

In summary

One could understand that investors are worried about the liabilities of Sociedad Química y Minera de Chile, but one can be reassured by the fact that it has a net cash position of US $ 5.10 million. In addition, it has increased its EBIT by 15% over the past twelve months. So we have no problem with the use of debt by the Sociedad Química y Minera de Chile. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 2 warning signs for Sociedad Química y Minera de Chile (1 is potentially serious) you should be aware of.

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

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 the mentioned stocks.

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