We think Sociedad Química y Minera de Chile (NYSE:SQM) can stay on top of its debt

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Above all, Sociedad Chemical and Minera de Chile SA (NYSE:SQM) is in debt. But does this debt worry shareholders?

When is debt dangerous?

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. In the worst case, 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 at a low price, thereby permanently diluting shareholders. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider cash and debt levels, together.

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

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

You can click on the graph below for historical numbers, but it shows that in June 2022, Sociedad Química y Minera de Chile had a debt of $2.61 billion, an increase from $1.94 billion dollars, over one year. On the other hand, it has $2.58 billion in cash, resulting in a net debt of around $32.9 million.

NYSE: SQM Debt to Equity September 25, 2022

A look at the liabilities of Sociedad Química y Minera de Chile

The latest balance sheet data shows that Sociedad Química y Minera de Chile had liabilities of US$3.39 billion due within one year, and liabilities of US$2.32 billion falling due by the after. On the other hand, it had $2.58 billion in cash and $1.53 billion in receivables at less than one year. Thus, its liabilities total $1.60 billion more than the combination of its cash and short-term receivables.

Given that Sociedad Química y Minera de Chile has a colossal market cap of US$26.8 billion, it’s hard to believe that these liabilities pose a big threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. Having virtually no net debt, Sociedad Química y Minera de Chile has very little 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). Thus, we consider debt to earnings with and without amortization and depreciation expense.

With debt at a measly 0.01 times EBITDA and an EBIT covering interest of 39.0 times, it is clear that Sociedad Química y Minera de Chile is not a desperate borrower. Thus, compared to previous income, the level of indebtedness seems insignificant. Even better, Sociedad Química y Minera de Chile increased its EBIT by 562% last year, which is an impressive improvement. If sustained, this growth will make debt even more manageable in years to come. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine the ability of Sociedad Química y Minera de Chile 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.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Sociedad Química y Minera de Chile has recorded a free cash flow of 34% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.

Our point of view

Sociedad Química y Minera de Chile’s interest coverage suggests they can manage their debt as easily as Cristiano Ronaldo could score a goal against an Under-14 goalkeeper. But, on a darker note, we are a bit concerned about its conversion of EBIT into free cash flow. Overall, we think Sociedad Química y Minera de Chile’s use of debt seems entirely reasonable and we are not worried about that. Although debt carries risks, when used wisely, it can also generate a higher return on equity. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. For example, we found 3 warning signs for Sociedad Química y Minera de Chile (2 are concerning!) that you should be aware of before investing here.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

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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About Myra R.

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