Is Organización Soriana S. A. B. de C. V (BMV:SORIANAB) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 can see that Organización Soriana, S. A. B. de C. V. (BMV:SORIANAB) does use debt in its business. But the more important question is: how much risk is that debt creating?

We've discovered 1 warning sign about Organización Soriana S. A. B. de C. V. View them for free.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

What Is Organización Soriana S. A. B. de C. V's Net Debt?

The chart below, which you can click on for greater detail, shows that Organización Soriana S. A. B. de C. V had Mex$18.4b in debt in December 2024; about the same as the year before. However, it does have Mex$9.62b in cash offsetting this, leading to net debt of about Mex$8.76b.

A Look At Organización Soriana S. A. B. de C. V's Liabilities

The latest balance sheet data shows that Organización Soriana S. A. B. de C. V had liabilities of Mex$40.3b due within a year, and liabilities of Mex$34.0b falling due after that. Offsetting these obligations, it had cash of Mex$9.62b as well as receivables valued at Mex$7.03b due within 12 months. So its liabilities total Mex$57.6b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of Mex$48.5b, we think shareholders really should watch Organización Soriana S. A. B. de C. V's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution.

See our latest analysis for Organización Soriana S. A. B. de C. V

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Looking at its net debt to EBITDA of 0.69 and interest cover of 2.9 times, it seems to us that Organización Soriana S. A. B. de C. V is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Sadly, Organización Soriana S. A. B. de C. V's EBIT actually dropped 8.2% in the last year. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Organización Soriana S. A. B. de C. V 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Organización Soriana S. A. B. de C. V's free cash flow amounted to 29% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

On the face of it, Organización Soriana S. A. B. de C. V's interest cover left us tentative about the stock, and its level of total liabilities was no more enticing than the one empty restaurant on the busiest night of the year. But on the bright side, its net debt to EBITDA is a good sign, and makes us more optimistic. Overall, we think it's fair to say that Organización Soriana S. A. B. de C. V has enough debt that there are some real risks around the balance sheet. If all goes well, that should boost returns, but on the flip side, the risk of permanent capital loss is elevated by the debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Organización Soriana S. A. B. de C. V you should be aware of.

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.