Is Alsea. de (BMV:ALSEA) Using Debt Sensibly?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Alsea, S.A.B. de C.V. (BMV:ALSEA) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Alsea. de

What Is Alsea. de's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Alsea. de had debt of Mex$33.4b, up from Mex$26.8b in one year. On the flip side, it has Mex$4.60b in cash leading to net debt of about Mex$28.8b.

A Look At Alsea. de's Liabilities

The latest balance sheet data shows that Alsea. de had liabilities of Mex$22.7b due within a year, and liabilities of Mex$54.2b falling due after that. Offsetting this, it had Mex$4.60b in cash and Mex$2.15b in receivables that were due within 12 months. So it has liabilities totalling Mex$70.1b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the Mex$21.8b company, like a colossus towering over mere mortals. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Alsea. de's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Alsea. de made a loss at the EBIT level, and saw its revenue drop to Mex$43b, which is a fall of 23%. That makes us nervous, to say the least.

Caveat Emptor

While Alsea. de's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost Mex$1.1b at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of Mex$2.9b in the last year. So while it's not wise to assume the company will fail, we do think it's risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Alsea. de that you should be aware of.

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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