We Think GCC. de (BMV:GCC) Can Manage Its Debt With Ease

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.' 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for GCC. de

What Is GCC. de's Net Debt?

The chart below, which you can click on for greater detail, shows that GCC. de had US$497.0m in debt in December 2023; about the same as the year before. But it also has US$958.7m in cash to offset that, meaning it has US$461.7m net cash.

How Strong Is GCC. de's Balance Sheet?

According to the last reported balance sheet, GCC. de had liabilities of US$268.4m due within 12 months, and liabilities of US$748.1m due beyond 12 months. Offsetting these obligations, it had cash of US$958.7m as well as receivables valued at US$142.6m due within 12 months. So it can boast US$84.9m more liquid assets than total liabilities.

This surplus suggests that GCC. de has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, GCC. de boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that GCC. de has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. 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. During the last three years, GCC. de generated free cash flow amounting to a very robust 81% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case GCC. de has US$461.7m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$110m, being 81% of its EBIT. So we don't think GCC. de's use of debt is risky. 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.