Is Kimberly-Clark de México S. A. B. de C. V (BMV:KIMBERA) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Kimberly-Clark de México, S. A. B. de C. V. (BMV:KIMBERA) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

See 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 Net Debt?

The image below, which you can click on for greater detail, shows that Kimberly-Clark de México S. A. B. de C. V had debt of Mex$29.2b at the end of September 2023, a reduction from Mex$33.6b over a year. On the flip side, it has Mex$18.5b in cash leading to net debt of about Mex$10.7b.

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

We can see from the most recent balance sheet that Kimberly-Clark de México S. A. B. de C. V had liabilities of Mex$20.6b falling due within a year, and liabilities of Mex$28.2b due beyond that. Offsetting this, it had Mex$18.5b in cash and Mex$7.01b in receivables that were due within 12 months. So its liabilities total Mex$23.2b more than the combination of its cash and short-term receivables.

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$113.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

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.

With net debt sitting at just 0.84 times EBITDA, Kimberly-Clark de México S. A. B. de C. V is arguably pretty conservatively geared. And it boasts interest cover of 7.1 times, which is more than adequate. In addition to that, we're happy to report that Kimberly-Clark de México S. A. B. de C. V has boosted its EBIT by 40%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. 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 company can only pay off debt with cold hard cash, not accounting profits. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, Kimberly-Clark de México S. A. B. de C. V recorded free cash flow worth 74% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Our View

Kimberly-Clark de México S. A. B. de C. V's EBIT growth rate suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Zooming out, Kimberly-Clark de México S. A. B. de C. V seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. 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. 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.

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.