Corporativo Fragua. de (BMV:FRAGUAB) Has A Rock Solid Balance Sheet

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.' 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. As with many other companies Corporativo Fragua, S.A.B. de C.V. (BMV:FRAGUAB) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Corporativo Fragua. de

What Is Corporativo Fragua. de's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Corporativo Fragua. de had Mex$1.39b of debt in September 2023, down from Mex$1.92b, one year before. However, it does have Mex$6.60b in cash offsetting this, leading to net cash of Mex$5.22b.

A Look At Corporativo Fragua. de's Liabilities

We can see from the most recent balance sheet that Corporativo Fragua. de had liabilities of Mex$21.0b falling due within a year, and liabilities of Mex$2.94b due beyond that. Offsetting this, it had Mex$6.60b in cash and Mex$2.51b in receivables that were due within 12 months. So it has liabilities totalling Mex$14.9b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Corporativo Fragua. de is worth Mex$46.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Corporativo Fragua. de boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Corporativo Fragua. de grew its EBIT by 30% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. Over the last three years, Corporativo Fragua. de recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay 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$5.22b. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in Mex$3.9b. 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, 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.