We Think Corporación Interamericana de Entretenimiento. de (BMV:CIEB) Can Stay On Top Of Its Debt

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Corporación Interamericana de Entretenimiento, S.A.B. de C.V. (BMV:CIEB) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Corporación Interamericana de Entretenimiento. de

How Much Debt Does Corporación Interamericana de Entretenimiento. de Carry?

You can click the graphic below for the historical numbers, but it shows that Corporación Interamericana de Entretenimiento. de had Mex$1.50b of debt in March 2024, down from Mex$2.00b, one year before. However, it does have Mex$1.80b in cash offsetting this, leading to net cash of Mex$297.8m.

A Look At Corporación Interamericana de Entretenimiento. de's Liabilities

We can see from the most recent balance sheet that Corporación Interamericana de Entretenimiento. de had liabilities of Mex$5.21b falling due within a year, and liabilities of Mex$2.51b due beyond that. Offsetting this, it had Mex$1.80b in cash and Mex$1.07b in receivables that were due within 12 months. So its liabilities total Mex$4.84b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Corporación Interamericana de Entretenimiento. de has a market capitalization of Mex$11.2b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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.

Better yet, Corporación Interamericana de Entretenimiento. de grew its EBIT by 228% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Corporación Interamericana de Entretenimiento. de's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Corporación Interamericana de Entretenimiento. 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. In the last three years, Corporación Interamericana de Entretenimiento. de created free cash flow amounting to 4.8% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While Corporación Interamericana de Entretenimiento. de does have more liabilities than liquid assets, it also has net cash of Mex$297.8m. And we liked the look of last year's 228% year-on-year EBIT growth. So we don't have any problem with Corporación Interamericana de Entretenimiento. de's use of debt. 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. For instance, we've identified 2 warning signs for Corporación Interamericana de Entretenimiento. de that you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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