Urbas Grupo Financiero (BME:UBS) Seems To Be Using A Lot Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Urbas Grupo Financiero, S.A. (BME:UBS) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Urbas Grupo Financiero

How Much Debt Does Urbas Grupo Financiero Carry?

As you can see below, at the end of June 2022, Urbas Grupo Financiero had €291.9m of debt, up from €189.8m a year ago. Click the image for more detail. However, because it has a cash reserve of €22.5m, its net debt is less, at about €269.4m.

How Healthy Is Urbas Grupo Financiero's Balance Sheet?

According to the last reported balance sheet, Urbas Grupo Financiero had liabilities of €329.2m due within 12 months, and liabilities of €264.2m due beyond 12 months. Offsetting these obligations, it had cash of €22.5m as well as receivables valued at €145.7m due within 12 months. So it has liabilities totalling €425.1m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of €517.1m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Urbas Grupo Financiero shareholders face the double whammy of a high net debt to EBITDA ratio (18.1), and fairly weak interest coverage, since EBIT is just 0.37 times the interest expense. This means we'd consider it to have a heavy debt load. One redeeming factor for Urbas Grupo Financiero is that it turned last year's EBIT loss into a gain of €6.8m, over the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Urbas Grupo Financiero's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. During the last year, Urbas Grupo Financiero burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both Urbas Grupo Financiero's interest cover and its track record of converting EBIT to free cash flow make us rather uncomfortable with its debt levels. Having said that, its ability to grow its EBIT isn't such a worry. We're quite clear that we consider Urbas Grupo Financiero to be really rather risky, as a result of its balance sheet health. So we're almost as wary of this stock as a hungry kitten is about falling into its owner's fish pond: once bitten, twice shy, as they say. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with Urbas Grupo Financiero (including 2 which are potentially serious) .

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.