Is Urbas Grupo Financiero (BME:UBS) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Urbas Grupo Financiero, S.A. (BME:UBS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Urbas Grupo Financiero

What Is Urbas Grupo Financiero's Net Debt?

As you can see below, at the end of December 2021, Urbas Grupo Financiero had €273.0m of debt, up from €214.3m a year ago. Click the image for more detail. On the flip side, it has €33.7m in cash leading to net debt of about €239.3m.

How Strong Is Urbas Grupo Financiero's Balance Sheet?

We can see from the most recent balance sheet that Urbas Grupo Financiero had liabilities of €340.1m falling due within a year, and liabilities of €243.4m due beyond that. Offsetting these obligations, it had cash of €33.7m as well as receivables valued at €118.6m due within 12 months. So it has liabilities totalling €431.3m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of €590.9m, so it does suggest shareholders should keep an eye on Urbas Grupo Financiero's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Urbas Grupo Financiero will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Urbas Grupo Financiero reported revenue of €202m, which is a gain of 838%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

Caveat Emptor

Despite the top line growth, Urbas Grupo Financiero still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €6.6m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €24m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 4 warning signs with Urbas Grupo Financiero (at least 1 which is significant) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, 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 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.