Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Grupo Cementos de Chihuahua, S.A.B. de C.V. (BMV:GCC) makes use of debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Grupo Cementos de Chihuahua. de Carry?
As you can see below, Grupo Cementos de Chihuahua. de had US$611.0m of debt at June 2021, down from US$696.7m a year prior. However, it also had US$592.9m in cash, and so its net debt is US$18.0m.
A Look At Grupo Cementos de Chihuahua. de's Liabilities
We can see from the most recent balance sheet that Grupo Cementos de Chihuahua. de had liabilities of US$343.0m falling due within a year, and liabilities of US$636.1m due beyond that. On the other hand, it had cash of US$592.9m and US$168.5m worth of receivables due within a year. So it has liabilities totalling US$217.6m more than its cash and near-term receivables, combined.
Since publicly traded Grupo Cementos de Chihuahua. de shares are worth a total of US$2.49b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Grupo Cementos de Chihuahua. de has a very light debt load indeed.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).
Grupo Cementos de Chihuahua. de has very modest net debt, giving rise to a debt to EBITDA ratio of 0.057. And EBIT easily covered the interest expense 8.7 times over, lending force to that view. Also good is that Grupo Cementos de Chihuahua. de grew its EBIT at 15% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Grupo Cementos de Chihuahua. 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. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, Grupo Cementos de Chihuahua. de actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Grupo Cementos de Chihuahua. de's conversion of EBIT to free cash flow 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 net debt to EBITDA also supports that impression! Zooming out, Grupo Cementos de Chihuahua. de 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. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Grupo Cementos de Chihuahua. de has 1 warning sign we think you should be aware of.
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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