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.' 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. Importantly, Kimberly-Clark de México, S. A. B. de C. V. (BMV:KIMBERA) does carry 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 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. 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.

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

What Is Kimberly-Clark de México S. A. B. de C. V's Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Kimberly-Clark de México S. A. B. de C. V had debt of Mex$30.6b, up from Mex$25.1b in one year. However, it does have Mex$19.1b in cash offsetting this, leading to net debt of about Mex$11.5b.

A Look At Kimberly-Clark de México S. A. B. de C. V's Liabilities

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$23.8b due within 12 months and liabilities of Mex$28.6b due beyond that. Offsetting these obligations, it had cash of Mex$19.1b as well as receivables valued at Mex$8.03b due within 12 months. So it has liabilities totalling Mex$25.3b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Kimberly-Clark de México S. A. B. de C. V is worth Mex$112.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Looking at its net debt to EBITDA of 0.95 and interest cover of 6.7 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. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. On top of that, Kimberly-Clark de México S. A. B. de C. V grew its EBIT by 40% 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 ultimately the future profitability of the business will decide if Kimberly-Clark de México S. A. B. de C. V can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, Kimberly-Clark de México S. A. B. de C. V recorded free cash flow worth 72% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Happily, Kimberly-Clark de México S. A. B. de C. V's impressive EBIT growth rate implies it has the upper hand on its debt. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. 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. After all, sensible leverage can boost returns on equity. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Kimberly-Clark de México S. A. B. de C. V , and understanding them should be part of your investment process.

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.