Grupo Comercial Chedraui. de (BMV:CHDRAUIB) Seems To Use Debt Quite Sensibly

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. Importantly, Grupo Comercial Chedraui, S.A.B. de C.V. (BMV:CHDRAUIB) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Grupo Comercial Chedraui. de

What Is Grupo Comercial Chedraui. de's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Grupo Comercial Chedraui. de had Mex$8.26b of debt in June 2024, down from Mex$9.55b, one year before. However, its balance sheet shows it holds Mex$9.07b in cash, so it actually has Mex$807.7m net cash.

How Strong Is Grupo Comercial Chedraui. de's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Grupo Comercial Chedraui. de had liabilities of Mex$42.7b due within 12 months and liabilities of Mex$62.8b due beyond that. Offsetting this, it had Mex$9.07b in cash and Mex$5.65b in receivables that were due within 12 months. So its liabilities total Mex$90.7b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of Mex$141.1b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Grupo Comercial Chedraui. de also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Grupo Comercial Chedraui. de grew its EBIT at 10% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Grupo Comercial Chedraui. de can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Grupo Comercial Chedraui. de may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Grupo Comercial Chedraui. de actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Grupo Comercial Chedraui. de does have more liabilities than liquid assets, it also has net cash of Mex$807.7m. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in Mex$17b. So we don't have any problem with Grupo Comercial Chedraui. de's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Grupo Comercial Chedraui. de, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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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.