Is Alsea. de (BMV:ALSEA) Weighed On By Its Debt Load?

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

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 December 2020 Alsea. de had Mex$32.2b of debt, an increase on Mex$26.3b, over one year. However, it also had Mex$3.93b in cash, and so its net debt is Mex$28.3b.

How Healthy Is Alsea. de's Balance Sheet?

According to the last reported balance sheet, Alsea. de had liabilities of Mex$22.5b due within 12 months, and liabilities of Mex$53.3b due beyond 12 months. Offsetting these obligations, it had cash of Mex$3.93b as well as receivables valued at Mex$2.89b due within 12 months. So its liabilities total Mex$69.0b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the Mex$27.2b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Alsea. de had a loss before interest and tax, and actually shrunk its revenue by 34%, to Mex$38b. To be frank that doesn't bode well.

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. To be specific the EBIT loss came in at Mex$1.4b. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost Mex$3.2b in just last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is quite risky. We'd prefer to pass. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Alsea. de (of which 1 is concerning!) 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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