We Think Corporativo Fragua. de (BMV:FRAGUAB) Can Manage Its Debt With Ease

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. As with many other companies Corporativo Fragua, S.A.B. de C.V. (BMV:FRAGUAB) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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

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$1.92b of debt in September 2022, down from Mex$2.22b, one year before. However, it does have Mex$4.44b in cash offsetting this, leading to net cash of Mex$2.52b.

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

According to the last reported balance sheet, Corporativo Fragua. de had liabilities of Mex$16.8b due within 12 months, and liabilities of Mex$2.36b due beyond 12 months. Offsetting these obligations, it had cash of Mex$4.44b as well as receivables valued at Mex$1.75b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$12.9b.

This deficit isn't so bad because Corporativo Fragua. de is worth Mex$32.2b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. 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!

In addition to that, we're happy to report that Corporativo Fragua. de has boosted its EBIT by 30%, thus reducing the spectre of future debt repayments. 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 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. Happily for any shareholders, Corporativo Fragua. de actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Corporativo Fragua. de does have more liabilities than liquid assets, it also has net cash of Mex$2.52b. And it impressed us with free cash flow of Mex$3.3b, being 117% of its EBIT. So we don't think Corporativo Fragua. de's use of debt is risky. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Corporativo Fragua. de's dividend history, without delay!

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.