Health Check: How Prudently Does Desarrolladora Homex. de (BMV:HOMEX) Use 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.' 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 Desarrolladora Homex, S.A.B. de C.V. (BMV:HOMEX) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Desarrolladora Homex. de

How Much Debt Does Desarrolladora Homex. de Carry?

The image below, which you can click on for greater detail, shows that at December 2022 Desarrolladora Homex. de had debt of Mex$143.1m, up from Mex$76.4m in one year. However, it does have Mex$39.1m in cash offsetting this, leading to net debt of about Mex$104.0m.

How Strong Is Desarrolladora Homex. de's Balance Sheet?

According to the last reported balance sheet, Desarrolladora Homex. de had liabilities of Mex$897.8m due within 12 months, and liabilities of Mex$158.0m due beyond 12 months. On the other hand, it had cash of Mex$39.1m and Mex$207.7m worth of receivables due within a year. So its liabilities total Mex$809.0m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the Mex$143.9m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Desarrolladora Homex. de would likely require a major re-capitalisation if it had to pay its creditors today. 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 Desarrolladora Homex. 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.

Over 12 months, Desarrolladora Homex. de made a loss at the EBIT level, and saw its revenue drop to Mex$977m, which is a fall of 9.6%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Desarrolladora Homex. de produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping Mex$55m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. Nevertheless, we would not bet on it given that it lost Mex$591k in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. 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, we've discovered 5 warning signs for Desarrolladora Homex. de (4 are potentially serious!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.