Corporativo Fragua. de (BMV:FRAGUAB) Could Easily Take On More Debt

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.' 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. We can see that Corporativo Fragua, S.A.B. de C.V. (BMV:FRAGUAB) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Corporativo Fragua. de

How Much Debt Does Corporativo Fragua. de Carry?

You can click the graphic below for the historical numbers, but it shows that Corporativo Fragua. de had Mex$873.6m of debt in March 2024, down from Mex$1.58b, one year before. However, it does have Mex$8.80b in cash offsetting this, leading to net cash of Mex$7.92b.

How Healthy Is Corporativo Fragua. de's Balance Sheet?

We can see from the most recent balance sheet that Corporativo Fragua. de had liabilities of Mex$22.7b falling due within a year, and liabilities of Mex$2.88b due beyond that. Offsetting this, it had Mex$8.80b in cash and Mex$2.97b in receivables that were due within 12 months. So it has liabilities totalling Mex$13.8b more than its cash and near-term receivables, combined.

Given Corporativo Fragua. de has a market capitalization of Mex$84.5b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Corporativo Fragua. de boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Corporativo Fragua. de grew its EBIT by 26% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Corporativo Fragua. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Corporativo Fragua. de has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Corporativo Fragua. de recorded free cash flow worth a fulsome 87% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Corporativo Fragua. de's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of Mex$7.92b. The cherry on top was that in converted 87% of that EBIT to free cash flow, bringing in Mex$3.6b. So we don't think Corporativo Fragua. de's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Corporativo Fragua. de, you may well want to click here to check an interactive graph of its earnings per share history.

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.