Corporación Interamericana de Entretenimiento. de (BMV:CIEB) Has Debt But No Earnings; Should You Worry?

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.' 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, Corporación Interamericana de Entretenimiento, S.A.B. de C.V. (BMV:CIEB) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Corporación Interamericana de Entretenimiento. de

What Is Corporación Interamericana de Entretenimiento. de's Debt?

As you can see below, at the end of September 2020, Corporación Interamericana de Entretenimiento. de had Mex$2.61b of debt, up from Mex$2.18b a year ago. Click the image for more detail. However, its balance sheet shows it holds Mex$3.18b in cash, so it actually has Mex$577.1m net cash.

How Healthy Is Corporación Interamericana de Entretenimiento. de's Balance Sheet?

The latest balance sheet data shows that Corporación Interamericana de Entretenimiento. de had liabilities of Mex$6.74b due within a year, and liabilities of Mex$3.37b falling due after that. Offsetting this, it had Mex$3.18b in cash and Mex$2.05b in receivables that were due within 12 months. So its liabilities total Mex$4.87b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of Mex$5.07b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Corporación Interamericana de Entretenimiento. de also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Corporación Interamericana de Entretenimiento. de will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Corporación Interamericana de Entretenimiento. de made a loss at the EBIT level, and saw its revenue drop to Mex$8.0b, which is a fall of 38%. That makes us nervous, to say the least.

So How Risky Is Corporación Interamericana de Entretenimiento. de?

Although Corporación Interamericana de Entretenimiento. de had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of Mex$487m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Corporación Interamericana de Entretenimiento. de (including 1 which shouldn't be ignored) .

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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