We Think Corporativo Fragua. de (BMV:FRAGUAB) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Corporativo Fragua, S.A.B. de C.V. (BMV:FRAGUAB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Corporativo Fragua. de Carry?

The image below, which you can click on for greater detail, shows that Corporativo Fragua. de had debt of Mex$993.3m at the end of December 2024, a reduction from Mex$1.28b over a year. But it also has Mex$6.16b in cash to offset that, meaning it has Mex$5.17b net cash.

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

Zooming in on the latest balance sheet data, we can see that Corporativo Fragua. de had liabilities of Mex$29.2b due within 12 months and liabilities of Mex$2.96b due beyond that. On the other hand, it had cash of Mex$6.16b and Mex$4.06b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$21.9b.

While this might seem like a lot, it is not so bad since Corporativo Fragua. de has a market capitalization of Mex$50.7b, 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. Despite its noteworthy liabilities, Corporativo Fragua. de boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Corporativo Fragua. de

In addition to that, we're happy to report that Corporativo Fragua. de has boosted its EBIT by 50%, 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 .

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 49% 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$5.17b. And it impressed us with its EBIT growth of 50% over the last year. So we are not troubled with Corporativo Fragua. de's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Corporativo Fragua. de is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.