Is Urbi Desarrollos Urbanos. de (BMV:URBI) Using Debt In A Risky Way?

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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Urbi Desarrollos Urbanos. de

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

You can click the graphic below for the historical numbers, but it shows that Urbi Desarrollos Urbanos. de had Mex$378.5m of debt in September 2020, down from Mex$429.4m, one year before. However, it does have Mex$23.2m in cash offsetting this, leading to net debt of about Mex$355.2m.

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$2.17b falling due within a year, and liabilities of Mex$134.7m due beyond that. Offsetting this, it had Mex$23.2m in cash and Mex$1.91m in receivables that were due within 12 months. So it has liabilities totalling Mex$2.28b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the Mex$121.9m 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, Urbi Desarrollos Urbanos. 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 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.

In the last year Urbi Desarrollos Urbanos. de had a loss before interest and tax, and actually shrunk its revenue by 20%, to Mex$322m. That's not what we would hope to see.

Caveat Emptor

While Urbi Desarrollos Urbanos. de's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable Mex$450m at the EBIT level. 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 fact is that it incinerated Mex$15m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Urbi Desarrollos Urbanos. de (1 is potentially serious) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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