Is Grupo KUO. de (BMV:KUOB) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Grupo KUO, S.A.B. de C.V. (BMV:KUOB) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Grupo KUO. de

How Much Debt Does Grupo KUO. de Carry?

You can click the graphic below for the historical numbers, but it shows that Grupo KUO. de had Mex$13.0b of debt in September 2023, down from Mex$14.2b, one year before. However, because it has a cash reserve of Mex$1.94b, its net debt is less, at about Mex$11.1b.

A Look At Grupo KUO. de's Liabilities

We can see from the most recent balance sheet that Grupo KUO. de had liabilities of Mex$14.0b falling due within a year, and liabilities of Mex$15.6b due beyond that. On the other hand, it had cash of Mex$1.94b and Mex$4.42b worth of receivables due within a year. So its liabilities total Mex$23.2b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's Mex$17.1b 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Grupo KUO. de 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.

In the last year Grupo KUO. de had a loss before interest and tax, and actually shrunk its revenue by 9.8%, to Mex$40b. That's not what we would hope to see.

Caveat Emptor

Importantly, Grupo KUO. de had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost Mex$62m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of Mex$1.3b and the profit of Mex$662m. So there is definitely a chance that it can improve things in the next few years. 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. For instance, we've identified 5 warning signs for Grupo KUO. de (1 shouldn't be ignored) you should be aware of.

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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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.