Here's Why Kimberly-Clark de México S. A. B. de C. V (BMV:KIMBERA) Can Manage Its Debt Responsibly

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. As with many other companies Kimberly-Clark de México, S. A. B. de C. V. (BMV:KIMBERA) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Kimberly-Clark de México S. A. B. de C. V

How Much Debt Does Kimberly-Clark de México S. A. B. de C. V Carry?

As you can see below, at the end of December 2020, Kimberly-Clark de México S. A. B. de C. V had Mex$31.8b of debt, up from Mex$23.7b a year ago. Click the image for more detail. On the flip side, it has Mex$18.6b in cash leading to net debt of about Mex$13.2b.

How Healthy Is Kimberly-Clark de México S. A. B. de C. V's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Kimberly-Clark de México S. A. B. de C. V had liabilities of Mex$15.6b due within 12 months and liabilities of Mex$32.1b due beyond that. On the other hand, it had cash of Mex$18.6b and Mex$5.98b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$23.1b.

While this might seem like a lot, it is not so bad since Kimberly-Clark de México S. A. B. de C. V has a market capitalization of Mex$105.3b, 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.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Looking at its net debt to EBITDA of 1.1 and interest cover of 6.3 times, it seems to us that Kimberly-Clark de México S. A. B. de C. V is probably using debt in a pretty reasonable way. So we'd recommend keeping a close eye on the impact financing costs are having on the business. And we also note warmly that Kimberly-Clark de México S. A. B. de C. V grew its EBIT by 17% last year, making its debt load easier to handle. 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 Kimberly-Clark de México S. A. B. de C. V'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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Kimberly-Clark de México S. A. B. de C. V recorded free cash flow worth a fulsome 88% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

The good news is that Kimberly-Clark de México S. A. B. de C. V's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its EBIT growth rate also supports that impression! Looking at the bigger picture, we think Kimberly-Clark de México S. A. B. de C. V's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Kimberly-Clark de México S. A. B. de C. V is showing 1 warning sign in our investment analysis , you should know about...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you decide to trade Kimberly-Clark de México S. A. B. de C. V, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.