Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Industrias Peñoles, S.A.B. de C.V. (BMV:PE&OLES) does use debt in its business. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
See our latest analysis for Industrias Peñoles. de
How Much Debt Does Industrias Peñoles. de Carry?
As you can see below, Industrias Peñoles. de had US$2.89b of debt at March 2024, down from US$3.09b a year prior. On the flip side, it has US$1.09b in cash leading to net debt of about US$1.80b.
How Strong Is Industrias Peñoles. de's Balance Sheet?
According to the last reported balance sheet, Industrias Peñoles. de had liabilities of US$1.12b due within 12 months, and liabilities of US$3.31b due beyond 12 months. On the other hand, it had cash of US$1.09b and US$657.4m worth of receivables due within a year. So its liabilities total US$2.68b more than the combination of its cash and short-term receivables.
Industrias Peñoles. de has a market capitalization of US$5.20b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Industrias Peñoles. 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.
Over 12 months, Industrias Peñoles. de reported revenue of US$5.9b, which is a gain of 6.9%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Industrias Peñoles. de had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$9.3m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Surprisingly, we note that it actually reported positive free cash flow of US$93m and a profit of US$105m. So one might argue that there's still a chance it can get things on the right track. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Industrias Peñoles. de you should know about.
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.
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About BMV:PE&OLES *
Industrias Peñoles. de
Engages in the exploration, extraction, and sale of mineral concentrates and ores in Mexico, Europe, Asia, North America, South America, and internationally.
Excellent balance sheet with questionable track record.
