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. As with many other companies Grupo Sports World, S.A.B. de C.V. (BMV:SPORTS) makes use of debt. But should shareholders be worried about its use of debt?
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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View 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 March 2021, Grupo Sports World. de had Mex$1.01b of debt, up from Mex$817.7m a year ago. Click the image for more detail. However, it also had Mex$67.5m in cash, and so its net debt is Mex$939.1m.
How Healthy Is Grupo Sports World. de's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Grupo Sports World. de had liabilities of Mex$986.8m due within 12 months and liabilities of Mex$2.67b due beyond that. On the other hand, it had cash of Mex$67.5m and Mex$54.8m worth of receivables due within a year. So it has liabilities totalling Mex$3.53b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the Mex$539.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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 you can't view debt in total isolation; since Grupo Sports World. de will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Grupo Sports World. de made a loss at the EBIT level, and saw its revenue drop to Mex$524m, which is a fall of 74%. That makes us nervous, to say the least.
Caveat Emptor
Not only did Grupo Sports World. de's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable Mex$749m at the EBIT level. 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. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through Mex$148m in the last year. So is this a high risk stock? We think so, and we'd avoid it. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Grupo Sports World. de (2 shouldn't be ignored!) that you should be aware of before investing here.
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.
