Warren Buffett famously said, '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 can see that Becle, S.A.B. de C.V. (BMV:CUERVO) does use debt in its business. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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 think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Becle. de
What Is Becle. de's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2020 Becle. de had Mex$9.96b of debt, an increase on Mex$9.39b, over one year. However, it does have Mex$7.95b in cash offsetting this, leading to net debt of about Mex$2.01b.
How Strong Is Becle. de's Balance Sheet?
According to the last reported balance sheet, Becle. de had liabilities of Mex$8.71b due within 12 months, and liabilities of Mex$18.1b due beyond 12 months. Offsetting this, it had Mex$7.95b in cash and Mex$11.2b in receivables that were due within 12 months. So it has liabilities totalling Mex$7.70b more than its cash and near-term receivables, combined.
Given Becle. de has a market capitalization of Mex$164.3b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Becle. de has virtually no net debt, so it's fair to say it does not have a heavy debt load!
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.
Becle. de's net debt is only 0.26 times its EBITDA. And its EBIT covers its interest expense a whopping 181 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also positive, Becle. de grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Becle. de's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Considering the last three years, Becle. de actually recorded a cash outflow, overall. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.
Our View
Happily, Becle. de's impressive interest cover implies it has the upper hand on its debt. But we must concede we find its conversion of EBIT to free cash flow has the opposite effect. When we consider the range of factors above, it looks like Becle. de is pretty sensible with its use of debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. Over time, share prices tend to follow earnings per share, so if you're interested in Becle. de, you may well want to click here to check an interactive graph of its earnings per share history.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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About BMV:CUERVO *
Becle. de
Manufactures and distributes spirits and other distilled beverages in Mexico, the United States, Canada, and internationally.
Solid track record with excellent balance sheet.
