Is Megacable Holdings S. A. B. de C. V (BMV:MEGACPO) Using Too Much Debt?

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. As with many other companies Megacable Holdings, S. A. B. de C. V. (BMV:MEGACPO) makes use of debt. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Megacable Holdings S. A. B. de C. V

How Much Debt Does Megacable Holdings S. A. B. de C. V Carry?

The image below, which you can click on for greater detail, shows that Megacable Holdings S. A. B. de C. V had debt of Mex$6.92b at the end of June 2021, a reduction from Mex$7.62b over a year. However, because it has a cash reserve of Mex$3.26b, its net debt is less, at about Mex$3.66b.

How Strong Is Megacable Holdings S. A. B. de C. V's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Megacable Holdings S. A. B. de C. V had liabilities of Mex$6.77b due within 12 months and liabilities of Mex$9.62b due beyond that. On the other hand, it had cash of Mex$3.26b and Mex$2.58b worth of receivables due within a year. So it has liabilities totalling Mex$10.5b more than its cash and near-term receivables, combined.

Given Megacable Holdings S. A. B. de C. V has a market capitalization of Mex$53.1b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Megacable Holdings S. A. B. de C. V has a low net debt to EBITDA ratio of only 0.32. And its EBIT easily covers its interest expense, being 11.5 times the size. So we're pretty relaxed about its super-conservative use of debt. The good news is that Megacable Holdings S. A. B. de C. V has increased its EBIT by 9.8% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Megacable Holdings S. A. B. de C. V'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the most recent three years, Megacable Holdings S. A. B. de C. V recorded free cash flow worth 59% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Megacable Holdings S. A. B. de C. V's interest cover 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! Taking all this data into account, it seems to us that Megacable Holdings S. A. B. de C. V takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. 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. Be aware that Megacable Holdings S. A. B. de C. V is showing 1 warning sign in our investment analysis , 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.

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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