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.' 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 note that CMR, S.A.B. de C.V. (BMV:CMRB) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
View our latest analysis for CMR. de
What Is CMR. de's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2020 CMR. de had debt of Mex$1.50b, up from Mex$662.1m in one year. However, it also had Mex$196.5m in cash, and so its net debt is Mex$1.30b.
A Look At CMR. de's Liabilities
We can see from the most recent balance sheet that CMR. de had liabilities of Mex$1.51b falling due within a year, and liabilities of Mex$1.72b due beyond that. On the other hand, it had cash of Mex$196.5m and Mex$236.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$2.80b.
This deficit casts a shadow over the Mex$1.01b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, CMR. 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 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.
In the last year CMR. de had a loss before interest and tax, and actually shrunk its revenue by 18%, to Mex$2.3b. That's not what we would hope to see.
Caveat Emptor
While CMR. 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. Its EBIT loss was a whopping Mex$405m. 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$633m 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. Take risks, for example - CMR. de has 3 warning signs (and 1 which is a bit concerning) we think you should know about.
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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About BMV:CMR B
Good value low.
