Does Fomento Económico Mexicano. de (BMV:FEMSAUBD) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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, Fomento Económico Mexicano, S.A.B. de C.V. (BMV:FEMSAUBD) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Fomento Económico Mexicano. de

What Is Fomento Económico Mexicano. de's Debt?

The image below, which you can click on for greater detail, shows that Fomento Económico Mexicano. de had debt of Mex$141.3b at the end of September 2023, a reduction from Mex$173.9b over a year. But on the other hand it also has Mex$160.4b in cash, leading to a Mex$19.1b net cash position.

How Strong Is Fomento Económico Mexicano. de's Balance Sheet?

The latest balance sheet data shows that Fomento Económico Mexicano. de had liabilities of Mex$193.0b due within a year, and liabilities of Mex$249.3b falling due after that. Offsetting this, it had Mex$160.4b in cash and Mex$63.3b in receivables that were due within 12 months. So it has liabilities totalling Mex$218.5b more than its cash and near-term receivables, combined.

Fomento Económico Mexicano. de has a very large market capitalization of Mex$674.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Fomento Económico Mexicano. de also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Fomento Económico Mexicano. de grew its EBIT by 39% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Fomento Económico Mexicano. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Fomento Económico Mexicano. 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. Over the most recent three years, Fomento Económico Mexicano. de recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While Fomento Económico Mexicano. de does have more liabilities than liquid assets, it also has net cash of Mex$19.1b. And we liked the look of last year's 39% year-on-year EBIT growth. So we don't think Fomento Económico Mexicano. de's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Fomento Económico Mexicano. de has 1 warning sign we think you should be aware of.

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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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.