Fomento Económico Mexicano. de (BMV:FEMSAUBD) Seems To Use Debt Quite Sensibly

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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?

We've discovered 1 warning sign about Fomento Económico Mexicano. de. View them for free.

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Fomento Económico Mexicano. de Carry?

As you can see below, at the end of December 2024, Fomento Económico Mexicano. de had Mex$148.2b of debt, up from Mex$136.8b a year ago. Click the image for more detail. However, it does have Mex$139.8b in cash offsetting this, leading to net debt of about Mex$8.37b.

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

The latest balance sheet data shows that Fomento Económico Mexicano. de had liabilities of Mex$205.3b due within a year, and liabilities of Mex$264.4b falling due after that. On the other hand, it had cash of Mex$139.8b and Mex$69.4b worth of receivables due within a year. So its liabilities total Mex$260.4b more than the combination of its cash and short-term receivables.

Fomento Económico Mexicano. de has a very large market capitalization of Mex$645.7b, 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. But either way, Fomento Económico Mexicano. de has virtually no net debt, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Fomento Económico Mexicano. de

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Fomento Económico Mexicano. de has very modest net debt, giving rise to a debt to EBITDA ratio of 0.081. And this impression is enhanced by its strong EBIT which covers interest costs 8.0 times. Also good is that Fomento Económico Mexicano. de grew its EBIT at 19% over the last year, further increasing its ability to manage debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Fomento Económico Mexicano. de recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Happily, Fomento Económico Mexicano. de's impressive net debt to EBITDA implies it has the upper hand on its debt. And the good news does not stop there, as its EBIT growth rate also supports that impression! Looking at all the aforementioned factors together, it strikes us that Fomento Económico Mexicano. de can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it's worth keeping an eye on this one. 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. To that end, you should be aware of the 1 warning sign we've spotted with Fomento Económico Mexicano. de .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.