Does Corporativo Fragua. de (BMV:FRAGUAB) Have A Healthy 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. We can see that Corporativo Fragua, S.A.B. de C.V. (BMV:FRAGUAB) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Corporativo Fragua. de

What Is Corporativo Fragua. de's Debt?

You can click the graphic below for the historical numbers, but it shows that Corporativo Fragua. de had Mex$1.47b of debt in June 2023, down from Mex$2.08b, one year before. But it also has Mex$6.93b in cash to offset that, meaning it has Mex$5.46b net cash.

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$19.9b falling due within a year, and liabilities of Mex$2.54b due beyond that. Offsetting this, it had Mex$6.93b in cash and Mex$1.95b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$13.5b.

Corporativo Fragua. de has a market capitalization of Mex$44.8b, so it could very likely raise cash to ameliorate 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. 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.

Another good sign is that Corporativo Fragua. de has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, Corporativo Fragua. de actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Corporativo Fragua. de does have more liabilities than liquid assets, it also has net cash of Mex$5.46b. And it impressed us with free cash flow of Mex$5.0b, being 101% of its EBIT. 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.