We Think Fomento Económico Mexicano. de (BMV:FEMSAUBD) Is Taking Some Risk With Its Debt

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. We note that Fomento Económico Mexicano, S.A.B. de C.V. (BMV:FEMSAUBD) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Net Debt?

As you can see below, Fomento Económico Mexicano. de had Mex$146.1b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have Mex$155.8b in cash offsetting this, leading to net cash of Mex$9.70b.

A Look At Fomento Económico Mexicano. de's Liabilities

The latest balance sheet data shows that Fomento Económico Mexicano. de had liabilities of Mex$209.4b due within a year, and liabilities of Mex$263.2b falling due after that. On the other hand, it had cash of Mex$155.8b and Mex$62.2b worth of receivables due within a year. So its liabilities total Mex$254.7b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Fomento Económico Mexicano. de has a huge market capitalization of Mex$592.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

It is just as well that Fomento Económico Mexicano. de's load is not too heavy, because its EBIT was down 32% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. In the last three years, Fomento Económico Mexicano. de's free cash flow amounted to 46% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While Fomento Económico Mexicano. de does have more liabilities than liquid assets, it also has net cash of Mex$9.70b. So while Fomento Económico Mexicano. de does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Fomento Económico Mexicano. de has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.