We Think Kimberly-Clark de México S. A. B. de C. V (BMV:KIMBERA) Can Stay On Top Of Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Kimberly-Clark de México, S. A. B. de C. V. (BMV:KIMBERA) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 at March 2023 Kimberly-Clark de México S. A. B. de C. V had debt of Mex$31.5b, up from Mex$27.9b in one year. However, because it has a cash reserve of Mex$17.9b, its net debt is less, at about Mex$13.6b.

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

The latest balance sheet data shows that Kimberly-Clark de México S. A. B. de C. V had liabilities of Mex$20.4b due within a year, and liabilities of Mex$33.2b falling due after that. Offsetting these obligations, it had cash of Mex$17.9b as well as receivables valued at Mex$8.06b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$27.7b.

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$108.9b, 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Looking at its net debt to EBITDA of 1.2 and interest cover of 5.9 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. We note that Kimberly-Clark de México S. A. B. de C. V grew its EBIT by 28% in the last year, and that should make it easier to pay down debt, going forward. 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 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Kimberly-Clark de México S. A. B. de C. V produced sturdy free cash flow equating to 72% 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.

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. 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. 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 you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.