Sociedad Química y Minera de Chile (NYSE:SQM) Takes On Some Risk With Its Use Of Debt
Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Sociedad Química y Minera de Chile S.A. (NYSE:SQM) does use debt in its business. But should shareholders be worried about its use of debt?
What Risk Does Debt Bring?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Sociedad Química y Minera de Chile's Net Debt?
As you can see below, Sociedad Química y Minera de Chile had US$4.65b of debt, at September 2025, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$2.39b in cash offsetting this, leading to net debt of about US$2.26b.
How Healthy Is Sociedad Química y Minera de Chile's Balance Sheet?
According to the last reported balance sheet, Sociedad Química y Minera de Chile had liabilities of US$1.96b due within 12 months, and liabilities of US$4.24b due beyond 12 months. On the other hand, it had cash of US$2.39b and US$1.05b worth of receivables due within a year. So its liabilities total US$2.76b more than the combination of its cash and short-term receivables.
Given Sociedad Química y Minera de Chile has a humongous market capitalization of US$19.7b, 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.
View our latest analysis for Sociedad Química y Minera de Chile
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Sociedad Química y Minera de Chile's net debt to EBITDA ratio of about 1.8 suggests only moderate use of debt. And its strong interest cover of 10.3 times, makes us even more comfortable. Shareholders should be aware that Sociedad Química y Minera de Chile's EBIT was down 22% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Sociedad Química y Minera de Chile basically broke even on a free cash flow basis. While many companies do operate at break-even, we prefer see substantial free cash flow, especially if a it already has dead.
Our View
Sociedad Química y Minera de Chile's EBIT growth rate was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. In particular, its interest cover was re-invigorating. Taking the abovementioned factors together we do think Sociedad Química y Minera de Chile's debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Sociedad Química y Minera de Chile has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.