Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Grupo Sports World, S.A.B. de C.V. (BMV:SPORTS) does carry debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Grupo Sports World. de
How Much Debt Does Grupo Sports World. de Carry?
As you can see below, at the end of September 2020, Grupo Sports World. de had Mex$966.1m of debt, up from Mex$779.7m a year ago. Click the image for more detail. However, because it has a cash reserve of Mex$176.2m, its net debt is less, at about Mex$789.8m.
A Look At Grupo Sports World. de's Liabilities
Zooming in on the latest balance sheet data, we can see that Grupo Sports World. de had liabilities of Mex$867.5m due within 12 months and liabilities of Mex$2.92b due beyond that. On the other hand, it had cash of Mex$176.2m and Mex$62.8m worth of receivables due within a year. So it has liabilities totalling Mex$3.55b more than its cash and near-term receivables, combined.
This deficit casts a shadow over the Mex$561.2m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Grupo Sports World. de would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Grupo Sports World. de's earnings that will influence how the balance sheet holds up in the future. 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, Grupo Sports World. de made a loss at the EBIT level, and saw its revenue drop to Mex$1.2b, which is a fall of 39%. To be frank that doesn't bode well.
Caveat Emptor
While Grupo Sports World. 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$303m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost Mex$558m in the last year. So we think buying this stock is 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. Like risks, for instance. Every company has them, and we've spotted 4 warning signs for Grupo Sports World. de (of which 1 is potentially serious!) 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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About BMV:SPORT S
Good value with proven track record.
