These 4 Measures Indicate That Fomento Económico Mexicano. de (BMV:FEMSAUBD) Is Using Debt Safely

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.' 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 the real question is whether this debt is making the company risky.

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. 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.

See our latest analysis for Fomento Económico Mexicano. de

What Is Fomento Económico Mexicano. de's Debt?

You can click the graphic below for the historical numbers, but it shows that Fomento Económico Mexicano. de had Mex$141.3b of debt in September 2023, down from Mex$173.9b, one year before. But it also has Mex$160.4b in cash to offset that, meaning it has Mex$19.1b net cash.

A Look At Fomento Económico Mexicano. de's Liabilities

We can see from the most recent balance sheet that Fomento Económico Mexicano. de had liabilities of Mex$193.0b falling due within a year, and liabilities of Mex$249.3b due beyond 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.

While this might seem like a lot, it is not so bad since Fomento Económico Mexicano. de has a huge market capitalization of Mex$767.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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!

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. There's no doubt that we learn most about debt from the balance sheet. 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 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. 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. During the last three years, Fomento Económico Mexicano. de produced sturdy free cash flow equating to 69% 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$19.1b. And it impressed us with its EBIT growth of 39% over the last year. So we don't think Fomento Económico Mexicano. de's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Fomento Económico Mexicano. de that you should be aware of before investing here.

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.