Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, GCC, S.A.B. de C.V. (BMV:GCC) does carry debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
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. 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. 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.
Check out our latest analysis for GCC. de
How Much Debt Does GCC. de Carry?
The image below, which you can click on for greater detail, shows that GCC. de had debt of US$496.6m at the end of March 2022, a reduction from US$619.6m over a year. However, it does have US$640.3m in cash offsetting this, leading to net cash of US$143.8m.
How Strong Is GCC. de's Balance Sheet?
We can see from the most recent balance sheet that GCC. de had liabilities of US$193.8m falling due within a year, and liabilities of US$679.8m due beyond that. Offsetting this, it had US$640.3m in cash and US$126.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$106.3m.
Given GCC. de has a market capitalization of US$1.95b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.
The good news is that GCC. de has increased its EBIT by 9.4% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if GCC. de can strengthen its balance sheet over time. 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. 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. Over the last three years, GCC. de actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While it is always sensible to look at a company's total liabilities, it is very reassuring that GCC. de has US$143.8m in net cash. And it impressed us with free cash flow of US$256m, being 118% 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.
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.
About BMV:GCC *
GCC. de
Through its subsidiaries, produces, distributes, and sells gray Portland cement, ready-mix concrete, aggregates, and other building construction materials in Mexico and the United States.
Flawless balance sheet and undervalued.
