Is Grupo Vasconia (BMV:VASCONI) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Grupo Vasconia, S.A.B. (BMV:VASCONI) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Grupo Vasconia

What Is Grupo Vasconia's Debt?

The chart below, which you can click on for greater detail, shows that Grupo Vasconia had Mex$1.82b in debt in December 2023; about the same as the year before. However, because it has a cash reserve of Mex$100.7m, its net debt is less, at about Mex$1.72b.

A Look At Grupo Vasconia's Liabilities

Zooming in on the latest balance sheet data, we can see that Grupo Vasconia had liabilities of Mex$3.16b due within 12 months and liabilities of Mex$228.9m due beyond that. Offsetting this, it had Mex$100.7m in cash and Mex$931.3m in receivables that were due within 12 months. So its liabilities total Mex$2.35b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the Mex$280.2m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Grupo Vasconia 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 you can't view debt in total isolation; since Grupo Vasconia will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Grupo Vasconia had a loss before interest and tax, and actually shrunk its revenue by 37%, to Mex$3.1b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Grupo Vasconia's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable Mex$155m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. 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$357m in the last year. So we're not very excited about owning this stock. Its too risky for us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Grupo Vasconia (of which 1 is potentially serious!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.