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

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. As with many other companies Grupo Comercial Chedraui, S.A.B. de C.V. (BMV:CHDRAUIB) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Grupo Comercial Chedraui. de

What Is Grupo Comercial Chedraui. de's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Grupo Comercial Chedraui. de had Mex$10.1b of debt, an increase on Mex$9.14b, over one year. However, because it has a cash reserve of Mex$9.55b, its net debt is less, at about Mex$562.8m.

A Look At Grupo Comercial Chedraui. de's Liabilities

According to the last reported balance sheet, Grupo Comercial Chedraui. de had liabilities of Mex$44.8b due within 12 months, and liabilities of Mex$68.2b due beyond 12 months. On the other hand, it had cash of Mex$9.55b and Mex$6.45b worth of receivables due within a year. So it has liabilities totalling Mex$97.0b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of Mex$116.9b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. But either way, Grupo Comercial Chedraui. de has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With net debt at just 0.031 times EBITDA, it seems Grupo Comercial Chedraui. de only uses a little bit of leverage. But EBIT was only 5.8 times the interest expense last year, so the borrowing is clearly weighing on the business somewhat. We saw Grupo Comercial Chedraui. de grow its EBIT by 5.5% in the last twelve months. Whilst that hardly knocks our socks off it is a positive when it comes to 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Happily for any shareholders, Grupo Comercial Chedraui. de actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Grupo Comercial Chedraui. de's conversion of EBIT to free cash flow was a real positive on this analysis, as was its net debt to EBITDA. On the other hand, its level of total liabilities makes us a little less comfortable about its debt. When we consider all the elements mentioned above, it seems to us that Grupo Comercial Chedraui. de is managing its debt quite well. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Grupo Comercial Chedraui. de's earnings per share history for free.

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. 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.