Is CMR. de (BMV:CMRB) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that CMR, S.A.B. de C.V. (BMV:CMRB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for CMR. de

What Is CMR. de's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 CMR. de had Mex$1.75b of debt, an increase on Mex$1.19b, over one year. On the flip side, it has Mex$486.7m in cash leading to net debt of about Mex$1.26b.

How Healthy Is CMR. de's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CMR. de had liabilities of Mex$1.19b due within 12 months and liabilities of Mex$2.25b due beyond that. Offsetting these obligations, it had cash of Mex$486.7m as well as receivables valued at Mex$199.8m due within 12 months. So its liabilities total Mex$2.76b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the Mex$1.25b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, CMR. de would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CMR. de will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, CMR. de made a loss at the EBIT level, and saw its revenue drop to Mex$2.0b, which is a fall of 31%. To be frank that doesn't bode well.

Caveat Emptor

Not only did CMR. de's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping Mex$693m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through Mex$6.2m in negative free cash flow over the last year. That means it's on the risky side of things. 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. For example, we've discovered 3 warning signs for CMR. de (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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