Would Grupo Industrial Saltillo. de (BMV:GISSAA) Be Better Off With Less Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Grupo Industrial Saltillo, S.A.B. de C.V. (BMV:GISSAA) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Grupo Industrial Saltillo. de

What Is Grupo Industrial Saltillo. de's Net Debt?

The image below, which you can click on for greater detail, shows that Grupo Industrial Saltillo. de had debt of US$259.9m at the end of September 2020, a reduction from US$312.8m over a year. On the flip side, it has US$75.8m in cash leading to net debt of about US$184.1m.

How Strong Is Grupo Industrial Saltillo. de's Balance Sheet?

The latest balance sheet data shows that Grupo Industrial Saltillo. de had liabilities of US$203.5m due within a year, and liabilities of US$349.3m falling due after that. On the other hand, it had cash of US$75.8m and US$155.2m worth of receivables due within a year. So it has liabilities totalling US$321.9m more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of US$409.7m. 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 it is future earnings, more than anything, that will determine Grupo Industrial Saltillo. de's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Grupo Industrial Saltillo. de had a loss before interest and tax, and actually shrunk its revenue by 25%, to US$601m. That makes us nervous, to say the least.

Caveat Emptor

While Grupo Industrial Saltillo. de's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at US$234k. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of US$17m. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Grupo Industrial Saltillo. de is showing 1 warning sign in our investment analysis , 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.

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