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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Corporativo Fragua, S.A.B. de C.V. (BMV:FRAGUAB) does use debt in its business. But is this debt a concern to shareholders?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

What Is Corporativo Fragua. de's Debt?

The image below, which you can click on for greater detail, shows that Corporativo Fragua. de had debt of Mex$238.3m at the end of March 2025, a reduction from Mex$873.6m over a year. But it also has Mex$4.89b in cash to offset that, meaning it has Mex$4.65b net cash.

A Look At Corporativo Fragua. de's Liabilities

According to the last reported balance sheet, Corporativo Fragua. de had liabilities of Mex$24.2b due within 12 months, and liabilities of Mex$2.92b due beyond 12 months. On the other hand, it had cash of Mex$4.89b and Mex$4.33b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$17.9b.

While this might seem like a lot, it is not so bad since Corporativo Fragua. de has a market capitalization of Mex$52.7b, 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. 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.

View our latest analysis for Corporativo Fragua. de

But the other side of the story is that Corporativo Fragua. de saw its EBIT decline by 3.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Corporativo Fragua. de's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Looking at the most recent three years, Corporativo Fragua. de recorded free cash flow of 32% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

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$4.65b. So we don't have any problem with Corporativo Fragua. de's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Corporativo Fragua. de (1 is a bit unpleasant!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.