Fomento Económico Mexicano. de (BMV:FEMSAUBD) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Fomento Económico Mexicano, S.A.B. de C.V. (BMV:FEMSAUBD) does use debt in its business. 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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Fomento Económico Mexicano. de

What Is Fomento Económico Mexicano. de's Debt?

As you can see below, Fomento Económico Mexicano. de had Mex$157.8b of debt at March 2023, down from Mex$185.2b a year prior. However, it also had Mex$99.9b in cash, and so its net debt is Mex$57.9b.

A Look At Fomento Económico Mexicano. de's Liabilities

The latest balance sheet data shows that Fomento Económico Mexicano. de had liabilities of Mex$190.3b due within a year, and liabilities of Mex$259.3b falling due after that. Offsetting these obligations, it had cash of Mex$99.9b as well as receivables valued at Mex$59.3b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$290.4b.

Fomento Económico Mexicano. de has a very large market capitalization of Mex$622.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

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.

Fomento Económico Mexicano. de's net debt is only 0.74 times its EBITDA. And its EBIT easily covers its interest expense, being 29.9 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. And we also note warmly that Fomento Económico Mexicano. de grew its EBIT by 11% last year, making its debt load easier to handle. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Fomento Económico Mexicano. de can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Fomento Económico Mexicano. de generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

The good news is that Fomento Económico Mexicano. de's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. But, on a more sombre note, we are a little concerned by its level of total liabilities. When we consider the range of factors above, it looks like Fomento Económico Mexicano. 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. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Fomento Económico Mexicano. de's earnings per share history for free.

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.