Here’s why Compañía Cervecerías Unidas (SNSE:CCU) can manage its debt responsibly

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Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We note that Compañía Cervecerias Unidas SA (SNSE:CCU) has debt on its balance sheet. But the real question is whether this debt makes the business risky.

Why is debt risky?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest review for Compañía Cervecerías Unidas

What is the debt of Compañía Cervecerías Unidas?

You can click on the graph below for historical figures, but it shows that in March 2022, Compañía Cervecerías Unidas had CL$1.02 billion in debt, an increase from CL$472.2 billion , over one year. However, he has CL$756.0 billion in cash to offset this, resulting in a net debt of approximately CL$268.6 billion.

SNSE: history of CCU debt to equity July 13, 2022

How strong is Compañía Cervecerías Unidas’ balance sheet?

According to the last published balance sheet, Compañía Cervecerías Unidas had liabilities of CL$819.5 billion maturing within 12 months and liabilities of CL$1.11 billion maturing beyond 12 months. In return, it had CL$756.0 billion in cash and CL$358.3 billion in receivables due within 12 months. Thus, its liabilities total CL$815.5 billion more than the combination of its cash and short-term receivables.

While that might sound like a lot, it’s not that bad since Compañía Cervecerías Unidas has a market capitalization of CL$2.14t, and so it could probably bolster its balance sheet by raising capital if needed. However, it is always worth taking a close look at its ability to repay debt.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).

Compañía Cervecerías Unidas’ net debt is only 0.61 times its EBITDA. And its EBIT covers its interest charges 13.7 times. So we’re pretty relaxed about his super-conservative use of debt. In addition, Compañía Cervecerías Unidas has increased its EBIT by 59% in the last twelve months, and this growth will facilitate the management of its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Compañía Cervecerías Unidas 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.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Compañía Cervecerías Unidas has recorded a free cash flow of 43% of its EBIT, which is lower than expected. It’s not great when it comes to paying off debt.

Our point of view

The good news is that Compañía Cervecerías Unidas’ demonstrated ability to cover its interest charges with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, since its EBIT growth rate also confirms this impression! When we consider the range of factors above, it seems that Compañía Cervecerías Unidas is quite sensitive with its use of debt. This means they take on a bit more risk, hoping to increase shareholder returns. 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 outside of the balance sheet. Be aware that Compañía Cervecerías Unidas shows 2 warning signs in our investment analysis you should know…

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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