Does Urbi Desarrollos Urbanos. de (BMV:URBI) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Urbi, Desarrollos Urbanos, S.A.B. de C.V. (BMV:URBI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Urbi Desarrollos Urbanos. de

How Much Debt Does Urbi Desarrollos Urbanos. de Carry?

The image below, which you can click on for greater detail, shows that Urbi Desarrollos Urbanos. de had debt of Mex$376.4m at the end of December 2020, a reduction from Mex$411.8m over a year. However, because it has a cash reserve of Mex$7.76m, its net debt is less, at about Mex$368.7m.

How Healthy Is Urbi Desarrollos Urbanos. de's Balance Sheet?

We can see from the most recent balance sheet that Urbi Desarrollos Urbanos. de had liabilities of Mex$2.43b falling due within a year, and liabilities of Mex$1.61m due beyond that. On the other hand, it had cash of Mex$7.76m and Mex$18.0m worth of receivables due within a year. So it has liabilities totalling Mex$2.41b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the Mex$96.4m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Urbi Desarrollos Urbanos. de would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Urbi Desarrollos Urbanos. 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, Urbi Desarrollos Urbanos. de made a loss at the EBIT level, and saw its revenue drop to Mex$259m, which is a fall of 41%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Urbi Desarrollos Urbanos. de's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping Mex$1.1b. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost Mex$1.2b in the last year. So we think buying this stock is risky. 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. Case in point: We've spotted 3 warning signs for Urbi Desarrollos Urbanos. de you should be aware of, and 2 of them make us uncomfortable.

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. 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.
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