Health Check: How Prudently Does Alsea. de (BMV:ALSEA) Use Debt?

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 note that Alsea, S.A.B. de C.V. (BMV:ALSEA) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Alsea. de

What Is Alsea. de's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Alsea. de had Mex$32.1b of debt, an increase on Mex$29.9b, over one year. However, it also had Mex$3.37b in cash, and so its net debt is Mex$28.7b.

How Healthy Is Alsea. de's Balance Sheet?

The latest balance sheet data shows that Alsea. de had liabilities of Mex$21.3b due within a year, and liabilities of Mex$54.1b falling due after that. Offsetting this, it had Mex$3.37b in cash and Mex$2.99b in receivables that were due within 12 months. So it has liabilities totalling Mex$69.0b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the Mex$33.0b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Alsea. de would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Alsea. 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.

Over 12 months, Alsea. de made a loss at the EBIT level, and saw its revenue drop to Mex$37b, which is a fall of 35%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Alsea. de's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost Mex$1.9b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of Mex$3.2b. In the meantime, we consider the stock to be risky. 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 Alsea. de is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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