GCC. de (BMV:GCC) Could Easily Take On More 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.' 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. Importantly, GCC, S.A.B. de C.V. (BMV:GCC) does carry debt. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for GCC. de

What Is GCC. de's Debt?

As you can see below, GCC. de had US$496.8m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$807.7m in cash offsetting this, leading to net cash of US$310.9m.

A Look At GCC. de's Liabilities

Zooming in on the latest balance sheet data, we can see that GCC. de had liabilities of US$270.8m due within 12 months and liabilities of US$717.3m due beyond that. On the other hand, it had cash of US$807.7m and US$133.0m worth of receivables due within a year. So its liabilities total US$47.4m more than the combination of its cash and short-term receivables.

This state of affairs indicates that GCC. de's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the US$3.02b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, GCC. de also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that GCC. de grew its EBIT by 12% 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 GCC. de'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. GCC. 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. Happily for any shareholders, GCC. de actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about GCC. de's liabilities, but we can be reassured by the fact it has has net cash of US$310.9m. The cherry on top was that in converted 114% of that EBIT to free cash flow, bringing in US$259m. So is GCC. de's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of GCC. de's earnings per share history for free.

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.