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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Urbi, Desarrollos Urbanos, S.A.B. de C.V. (BMV:URBI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Urbi Desarrollos Urbanos. de

What Is Urbi Desarrollos Urbanos. de's Net Debt?

As you can see below, Urbi Desarrollos Urbanos. de had Mex$382.9m of debt at March 2021, down from Mex$399.9m a year prior. However, it also had Mex$11.6m in cash, and so its net debt is Mex$371.4m.

A Look At Urbi Desarrollos Urbanos. de's Liabilities

Zooming in on the latest balance sheet data, we can see that Urbi Desarrollos Urbanos. de had liabilities of Mex$2.44b due within 12 months and liabilities of Mex$1.58m due beyond that. Offsetting this, it had Mex$11.6m in cash and Mex$21.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$2.41b.

This deficit casts a shadow over the Mex$75.4m 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Urbi Desarrollos Urbanos. de's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Urbi Desarrollos Urbanos. de had a loss before interest and tax, and actually shrunk its revenue by 47%, to Mex$225m. That makes us nervous, to say the least.

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$787m. 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. Sure, the company might have a nice story about how they are going on to a brighter future. 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're not very excited about owning this stock. Its too risky for us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Urbi Desarrollos Urbanos. de (2 are significant!) that you should be aware of before investing here.

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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