These 4 Measures Indicate That GCC. de (BMV:GCC) Is Using Debt Safely

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 GCC, S.A.B. de C.V. (BMV:GCC) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for GCC. de

How Much Debt Does GCC. de Carry?

The chart below, which you can click on for greater detail, shows that GCC. de had US$497.1m in debt in June 2024; about the same as the year before. But on the other hand it also has US$879.4m in cash, leading to a US$382.2m net cash position.

How Healthy Is GCC. de's Balance Sheet?

We can see from the most recent balance sheet that GCC. de had liabilities of US$294.7m falling due within a year, and liabilities of US$758.3m due beyond that. Offsetting these obligations, it had cash of US$879.4m as well as receivables valued at US$189.4m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

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 it's very unlikely that the US$2.60b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that GCC. de has more cash than debt is arguably a good indication that it can manage its debt safely.

Also positive, GCC. de grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While GCC. de has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, GCC. de produced sturdy free cash flow equating to 60% 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.

Summing Up

While it is always sensible to investigate a company's debt, in this case GCC. de has US$382.2m in net cash and a decent-looking balance sheet. And we liked the look of last year's 29% year-on-year EBIT growth. So we don't think GCC. de's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in GCC. de, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.