Is Urbi Desarrollos Urbanos. de (BMV:URBI) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Urbi, Desarrollos Urbanos, S.A.B. de C.V. (BMV:URBI) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Urbi Desarrollos Urbanos. de

How Much Debt Does Urbi Desarrollos Urbanos. de Carry?

The chart below, which you can click on for greater detail, shows that Urbi Desarrollos Urbanos. de had Mex$381.4m in debt in June 2021; about the same as the year before. Net debt is about the same, since the it doesn't have much cash.

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$2.41b due within 12 months and liabilities of Mex$1.46m due beyond that. On the other hand, it had cash of Mex$4.39m and Mex$23.6m worth of receivables due within a year. So it has liabilities totalling Mex$2.38b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the Mex$90.1m 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 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$222m, which is a fall of 40%. To be frank that doesn't bode well.

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. Its EBIT loss was a whopping Mex$765m. 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'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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for Urbi Desarrollos Urbanos. de you should be aware of.

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.

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.

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