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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Megacable Holdings, S. A. B. de C. V. (BMV:MEGACPO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

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

What Is Megacable Holdings S. A. B. de C. V's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2023 Megacable Holdings S. A. B. de C. V had Mex$15.2b of debt, an increase on Mex$7.64b, over one year. However, because it has a cash reserve of Mex$1.65b, its net debt is less, at about Mex$13.5b.

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

Zooming in on the latest balance sheet data, we can see that Megacable Holdings S. A. B. de C. V had liabilities of Mex$9.96b due within 12 months and liabilities of Mex$15.6b due beyond that. Offsetting this, it had Mex$1.65b in cash and Mex$3.76b in receivables that were due within 12 months. So its liabilities total Mex$20.1b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Megacable Holdings S. A. B. de C. V has a market capitalization of Mex$35.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

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.

Looking at its net debt to EBITDA of 1.0 and interest cover of 4.2 times, it seems to us that Megacable Holdings S. A. B. de C. V is probably using debt in a pretty reasonable way. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Unfortunately, Megacable Holdings S. A. B. de C. V saw its EBIT slide 9.7% in the last twelve months. If earnings continue on that decline then managing that debt will be difficult like delivering hot soup on a unicycle. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. In the last three years, Megacable Holdings S. A. B. de C. V's free cash flow amounted to 26% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

At the end of the day, we're far from enamoured with Megacable Holdings S. A. B. de C. V's ability to grow its EBIT or to convert EBIT to free cash flow. But the silver lining is its relatively strong net debt to EBITDA. Once we consider all the factors above, together, it seems to us that Megacable Holdings S. A. B. de C. V's debt is making it a bit risky. That's not necessarily a bad thing, but we'd generally feel more comfortable with less leverage. 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. For example - Megacable Holdings S. A. B. de C. V has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.