Is Corporativo Fragua. de (BMV:FRAGUAB) A Risky Investment?

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 real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See 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$1.20b of debt in December 2020, down from Mex$1.48b, one year before. But on the other hand it also has Mex$3.51b in cash, leading to a Mex$2.31b net cash position.

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

According to the last reported balance sheet, Corporativo Fragua. de had liabilities of Mex$16.6b due within 12 months, and liabilities of Mex$1.95b due beyond 12 months. On the other hand, it had cash of Mex$3.51b and Mex$1.80b worth of receivables due within a year. So its liabilities total Mex$13.2b more than the combination of its cash and short-term receivables.

Corporativo Fragua. de has a market capitalization of Mex$26.2b, 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.

Even more impressive was the fact that Corporativo Fragua. de grew its EBIT by 261% over twelve months. That boost will make it even easier to pay down debt going forward. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 26% 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$2.31b. And it impressed us with its EBIT growth of 261% over the last year. 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.

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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