Is Naturgy Chile Gas Natural (SNSE:NTGCLGAS) a risky investment?

Some people say that volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said, “Volatility is not synonymous with risk.” When we think about a company’s risk, we always look at its use of debt. Because too much debt can lead to ruin.Like many other companies Naturgy Chili Gas Natural SA (SNSE:NTGCLGAS) uses debt. But the real question is whether this debt is putting the company at risk.

When is debt a problem?

Debt supports a company until the company has difficulty paying it back with new capital or free cash flow. If the situation gets too bad, lenders may take control of your business. But a more common (but still expensive) situation is when a company needs to dilute shareholders at a cheap share price just to manage its debt. Of course, debt can be an important tool in business, especially in capital-heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.

See our latest analysis for Naturgy Chile Gas Natural.

What is Naturgy Chile Gas Natural’s debt?

The image below, which you can click on for greater detail, shows that Naturgy Chile Gas Natural had debt of CL$462.7b at the end of September 2023, down from CL$528.7b over one year. However, it does have CL$294.2b in cash offsetting this, resulting in a net debt of approximately CL$168.5b.

How strong is Naturgy Chile Gas Natural’s balance sheet?

Zooming in on the latest balance sheet data, we can see that Naturgy Chile Gas Natural had liabilities of CL$187.6b due within 12 months, and liabilities of CL$1.08t due beyond that. Offsetting these obligations, the company had cash of CL$294.2b and receivables worth CL$134.7b due within 12 months. So it has liabilities totaling CL$841.6b more than its cash and short-term receivables, combined.

The deficit casts a shadow over the CL$525.6 billion company like a colossus towering over the average person. So we definitely think shareholders need to monitor this closely. After all, if Naturgy Chile Gas Natural had to pay its creditors today, it would likely require a major recapitalization.

We look at net debt divided by earnings before interest, tax, depreciation and amortization (EBITDA) and calculate how easily a company’s earnings before interest, tax, depreciation and amortization (EBIT) cover interest. Measure your debt load. Expenses (interest burden). This way, we consider both the absolute amount of debt and the interest rate paid on it.

Naturgy Chile Gas Natural’s net debt is just 0.59 times its EBITDA. And its EBIT covers its interest expense by a whopping 51.2 times. Therefore, one could argue that elephants are no more threatened by debt than elephants are threatened by rats. Even better, Naturgy Chile Gas Natural grew its EBIT by 179% in the last year. This is a remarkable improvement. This boost will make future debt repayments easier. There’s no question that we learn most about debt from the balance sheet. However, debt cannot be considered completely separately. This is because Naturgy Chile Gas Natural needs the profits to service its debt. So when considering debt, it’s worth keeping an eye on the earnings trend. Click here to view an interactive snapshot.

Finally, while tax preparers may adore accounting profits, lenders only accept cold hard cash. So it’s clear that we need to check whether that EBIT is leading to corresponding free cash flow. Fortunately for shareholders, Naturgy Chile Gas Natural actually generated more free cash flow than its EBIT over the last three years. This kind of powerful redemption excites us as much as the audience at a Daft Punk concert when the beat drops.

our view

The good news is that Naturgy Chile Gas Natural has demonstrated the ability to cover its interest costs with EBIT. They bring us joy like a fluffy puppy waddling around. But the hard truth is that we are concerned about its level of total debt. We also note that gas companies like Naturgy Chile Gas Natural typically use debt without issue. Taking all this into account, Naturgy Chile Gas Natural seems to be able to handle its current debt levels just fine. On the plus side, this leverage could increase shareholder returns, but the potential downside is that it increases the risk of loss, so it’s worth keeping an eye on the balance sheet. There’s no question that we learn most about debt from the balance sheet. Ultimately, however, any company can contain risks that exist outside the balance sheet. For example, Naturgy Chile Gas Natural 3 warning signs (and two important ones) that I think you should know about.

If you’re more interested in fast-growing companies with rock-solid balance sheets, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.