Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Grupo KUO, S.A.B. de C.V. (BMV:KUOB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Grupo KUO. de
What Is Grupo KUO. de's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2020 Grupo KUO. de had debt of Mex$19.1b, up from Mex$17.1b in one year. However, because it has a cash reserve of Mex$1.75b, its net debt is less, at about Mex$17.3b.
How Strong Is Grupo KUO. de's Balance Sheet?
According to the last reported balance sheet, Grupo KUO. de had liabilities of Mex$10.8b due within 12 months, and liabilities of Mex$22.2b due beyond 12 months. Offsetting this, it had Mex$1.75b in cash and Mex$3.59b in receivables that were due within 12 months. So its liabilities total Mex$27.6b more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company's Mex$21.9b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Grupo KUO. de will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Grupo KUO. de reported revenue of Mex$29b, which is a gain of 5.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Grupo KUO. de had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost Mex$386m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through Mex$611m in negative free cash flow over the last year. So suffice it to say we consider the stock to be 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. For example - Grupo KUO. de has 2 warning signs we think you should be aware of.
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.
If you’re looking to trade Grupo KUO. de, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted
New: Manage All Your Stock Portfolios in One Place
We've created the ultimate portfolio companion for stock investors, and it's free.
• Connect an unlimited number of Portfolios and see your total in one currency
• Be alerted to new Warning Signs or Risks via email or mobile
• Track the Fair Value of your stocks
This article by Simply Wall St is general in nature. 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.
*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
About BMV:KUO B
Grupo KUO. de
Through its subsidiaries, manufactures and sells consumer products, plastics, chemical products, and auto parts in Mexico, the United States, Spain, Belgium, and China.
Moderate and good value.
