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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Fomento Económico Mexicano, S.A.B. de C.V. (BMV:FEMSAUBD) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Fomento Económico Mexicano. de

What Is Fomento Económico Mexicano. de's Net Debt?

The image below, which you can click on for greater detail, shows that Fomento Económico Mexicano. de had debt of Mex$131.4b at the end of March 2024, a reduction from Mex$157.8b over a year. But it also has Mex$137.5b in cash to offset that, meaning it has Mex$6.15b net cash.

A Look At Fomento Económico Mexicano. de's Liabilities

According to the last reported balance sheet, Fomento Económico Mexicano. de had liabilities of Mex$206.7b due within 12 months, and liabilities of Mex$243.4b due beyond 12 months. On the other hand, it had cash of Mex$137.5b and Mex$58.7b worth of receivables due within a year. So it has liabilities totalling Mex$254.0b more than its cash and near-term receivables, combined.

Fomento Económico Mexicano. de has a very large market capitalization of Mex$641.6b, 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. Despite its noteworthy liabilities, Fomento Económico Mexicano. de boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that Fomento Económico Mexicano. de has seen its EBIT plunge 12% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Fomento Económico Mexicano. de has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Fomento Económico Mexicano. de produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. 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$6.15b. So we don't have any problem with Fomento Económico Mexicano. de's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Fomento Económico Mexicano. 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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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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