Here's Why Organización Cultiba. de (BMV:CULTIBAB) Can Manage Its Debt Responsibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Organización Cultiba, S.A.B. de C.V. (BMV:CULTIBAB) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Organización Cultiba. de

How Much Debt Does Organización Cultiba. de Carry?

As you can see below, at the end of December 2020, Organización Cultiba. de had Mex$1.73b of debt, up from Mex$1.49b a year ago. Click the image for more detail. But on the other hand it also has Mex$2.12b in cash, leading to a Mex$394.2m net cash position.

How Strong Is Organización Cultiba. de's Balance Sheet?

We can see from the most recent balance sheet that Organización Cultiba. de had liabilities of Mex$3.47b falling due within a year, and liabilities of Mex$1.10b due beyond that. Offsetting this, it had Mex$2.12b in cash and Mex$950.1m in receivables that were due within 12 months. So it has liabilities totalling Mex$1.50b more than its cash and near-term receivables, combined.

Of course, Organización Cultiba. de has a market capitalization of Mex$9.04b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Organización Cultiba. de boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Organización Cultiba. de grew its EBIT by 129% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Organización Cultiba. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Organización Cultiba. de may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Organización Cultiba. de created free cash flow amounting to 7.9% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

Although Organización Cultiba. de's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of Mex$394.2m. And it impressed us with its EBIT growth of 129% over the last year. So we are not troubled with Organización Cultiba. de's debt use. 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. Case in point: We've spotted 2 warning signs for Organización Cultiba. de you should be aware of.

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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