Corporación Inmobiliaria Vesta. de (BMV:VESTA) Takes On Some Risk With Its Use Of Debt

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. We note that Corporación Inmobiliaria Vesta S.A.B. de C.V. (BMV:VESTA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Corporación Inmobiliaria Vesta. de

What Is Corporación Inmobiliaria Vesta. de's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Corporación Inmobiliaria Vesta. de had US$843.9m of debt, an increase on US$714.4m, over one year. However, it does have US$120.4m in cash offsetting this, leading to net debt of about US$723.5m.

A Look At Corporación Inmobiliaria Vesta. de's Liabilities

According to the last reported balance sheet, Corporación Inmobiliaria Vesta. de had liabilities of US$28.5m due within 12 months, and liabilities of US$1.12b due beyond 12 months. Offsetting these obligations, it had cash of US$120.4m as well as receivables valued at US$21.2m due within 12 months. So it has liabilities totalling US$1.00b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of US$1.17b, so it does suggest shareholders should keep an eye on Corporación Inmobiliaria Vesta. de's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Corporación Inmobiliaria Vesta. de has a rather high debt to EBITDA ratio of 5.9 which suggests a meaningful debt load. But the good news is that it boasts fairly comforting interest cover of 3.1 times, suggesting it can responsibly service its obligations. The good news is that Corporación Inmobiliaria Vesta. de improved its EBIT by 3.4% over the last twelve months, thus gradually reducing its debt levels relative to its earnings. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Corporación Inmobiliaria Vesta. de can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, Corporación Inmobiliaria Vesta. de recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Our View

Corporación Inmobiliaria Vesta. de's net debt to EBITDA and interest cover definitely weigh on it, in our esteem. But the good news is it seems to be able to convert EBIT to free cash flow with ease. We think that Corporación Inmobiliaria Vesta. de's debt does make it a bit risky, after considering the aforementioned data points together. That's not necessarily a bad thing, since leverage can boost returns on equity, but it is something to be aware of. 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 4 warning signs for Corporación Inmobiliaria Vesta. de (of which 1 is potentially serious!) 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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