Corporativo Fragua. de (BMV:FRAGUAB) Has A Pretty Healthy Balance Sheet

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.' 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 Corporativo Fragua, S.A.B. de C.V. (BMV:FRAGUAB) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Corporativo Fragua. de

What Is Corporativo Fragua. de's Debt?

As you can see below, Corporativo Fragua. de had Mex$1.42b of debt at September 2020, down from Mex$1.56b a year prior. But it also has Mex$2.40b in cash to offset that, meaning it has Mex$985.0m net cash.

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

According to the last reported balance sheet, Corporativo Fragua. de had liabilities of Mex$13.2b due within 12 months, and liabilities of Mex$1.84b due beyond 12 months. Offsetting this, it had Mex$2.40b in cash and Mex$1.63b in receivables that were due within 12 months. So it has liabilities totalling Mex$11.1b more than its cash and near-term receivables, combined.

Corporativo Fragua. de has a market capitalization of Mex$25.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Corporativo Fragua. de also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Corporativo Fragua. de grew its EBIT at 16% 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 Corporativo Fragua. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Looking at the most recent three years, Corporativo Fragua. de recorded free cash flow of 34% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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$985.0m. And it impressed us with its EBIT growth of 16% over the last year. So we don't have any problem with Corporativo Fragua. de's use of debt. 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.

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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