David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Grupo Sports World, S.A.B. de C.V. (BMV:SPORTS) makes use of debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Grupo Sports World. de
What Is Grupo Sports World. de's Net Debt?
As you can see below, at the end of June 2021, Grupo Sports World. de had Mex$1.02b of debt, up from Mex$946.8m a year ago. Click the image for more detail. On the flip side, it has Mex$120.0m in cash leading to net debt of about Mex$901.9m.
How Healthy Is Grupo Sports World. de's Balance Sheet?
According to the last reported balance sheet, Grupo Sports World. de had liabilities of Mex$1.19b due within 12 months, and liabilities of Mex$2.57b due beyond 12 months. Offsetting these obligations, it had cash of Mex$120.0m as well as receivables valued at Mex$57.4m due within 12 months. So it has liabilities totalling Mex$3.58b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the Mex$615.3m 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. At the end of the day, Grupo Sports World. de would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. 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.
In the last year Grupo Sports World. de had a loss before interest and tax, and actually shrunk its revenue by 64%, to Mex$574m. 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$597m at the EBIT level. 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. But we think that is unlikely since it is low on liquid assets, and made a loss of Mex$607m in the last year. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Grupo Sports World. de (1 is potentially serious!) 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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
