Megacable Holdings S. A. B. de C. V (BMV:MEGACPO) Has A Pretty Healthy Balance Sheet

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. Importantly, Megacable Holdings, S. A. B. de C. V. (BMV:MEGACPO) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt 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$6.62b at the end of September 2021, a reduction from Mex$7.04b over a year. However, because it has a cash reserve of Mex$2.74b, its net debt is less, at about Mex$3.88b.

A Look At Megacable Holdings S. A. B. de C. V's Liabilities

We can see from the most recent balance sheet that Megacable Holdings S. A. B. de C. V had liabilities of Mex$9.45b falling due within a year, and liabilities of Mex$6.64b due beyond that. On the other hand, it had cash of Mex$2.74b and Mex$4.60b worth of receivables due within a year. So its liabilities total Mex$8.75b more than the combination of its cash and short-term receivables.

Given Megacable Holdings S. A. B. de C. V has a market capitalization of Mex$57.1b, 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.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With net debt sitting at just 0.34 times EBITDA, Megacable Holdings S. A. B. de C. V is arguably pretty conservatively geared. And it boasts interest cover of 7.9 times, which is more than adequate. The good news is that Megacable Holdings S. A. B. de C. V has increased its EBIT by 8.3% 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Megacable Holdings S. A. B. de C. V recorded free cash flow worth 64% 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 net debt to EBITDA suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Megacable Holdings S. A. B. de C. V 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.