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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Corporativo Fragua, S.A.B. de C.V. (BMV:FRAGUAB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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

How Much Debt Does Corporativo Fragua. de Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Corporativo Fragua. de had Mex$1.20b of debt, an increase on Mex$1.02b, over one year. But it also has Mex$2.48b in cash to offset that, meaning it has Mex$1.28b net cash.

A Look At Corporativo Fragua. de's Liabilities

Zooming in on the latest balance sheet data, we can see that Corporativo Fragua. de had liabilities of Mex$15.6b due within 12 months and liabilities of Mex$1.80b due beyond that. Offsetting these obligations, it had cash of Mex$2.48b as well as receivables valued at Mex$1.86b due within 12 months. So it has liabilities totalling Mex$13.1b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Corporativo Fragua. de has a market capitalization of Mex$33.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Corporativo Fragua. de boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Corporativo Fragua. de's EBIT launched higher than Elon Musk, gaining a whopping 101% on last year. There's no doubt that we learn most about debt from the balance sheet. 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, a company can only pay off debt with cold hard cash, not accounting profits. Corporativo Fragua. 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. In the last three years, Corporativo Fragua. de's free cash flow amounted to 44% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

While Corporativo Fragua. de does have more liabilities than liquid assets, it also has net cash of Mex$1.28b. And we liked the look of last year's 101% year-on-year EBIT growth. So we don't have any problem with Corporativo Fragua. de's use of debt. 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 Corporativo Fragua. de's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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