Is Grupo Gigante S. A. B. de C. V (BMV:GIGANTE) Using Too Much Debt?

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. We note that Grupo Gigante, S. A. B. de C. V. (BMV:GIGANTE) does have debt on its balance sheet. 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 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 Grupo Gigante S. A. B. de C. V

How Much Debt Does Grupo Gigante S. A. B. de C. V Carry?

You can click the graphic below for the historical numbers, but it shows that Grupo Gigante S. A. B. de C. V had Mex$10.2b of debt in March 2023, down from Mex$11.2b, one year before. However, because it has a cash reserve of Mex$3.73b, its net debt is less, at about Mex$6.52b.

A Look At Grupo Gigante S. A. B. de C. V's Liabilities

According to the last reported balance sheet, Grupo Gigante S. A. B. de C. V had liabilities of Mex$9.20b due within 12 months, and liabilities of Mex$16.3b due beyond 12 months. Offsetting these obligations, it had cash of Mex$3.73b as well as receivables valued at Mex$3.34b due within 12 months. So it has liabilities totalling Mex$18.5b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of Mex$25.4b, so it does suggest shareholders should keep an eye on Grupo Gigante S. A. B. de C. V's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

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

Even though Grupo Gigante S. A. B. de C. V's debt is only 1.9, its interest cover is really very low at 1.7. This does suggest the company is paying fairly high interest rates. Either way there's no doubt the stock is using meaningful leverage. Sadly, Grupo Gigante S. A. B. de C. V's EBIT actually dropped 2.7% in the last year. If that earnings trend continues then its debt load will grow heavy like the heart of a polar bear watching its sole cub. There's no doubt that we learn most about debt from the balance sheet. But it is Grupo Gigante S. A. B. de C. V'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 company can only pay off debt with cold hard cash, not accounting profits. So it's worth checking how much of that EBIT is backed by free cash flow. Happily for any shareholders, Grupo Gigante S. A. B. de C. V actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Neither Grupo Gigante S. A. B. de C. V's ability to cover its interest expense with its EBIT nor its level of total liabilities gave us confidence in its ability to take on more debt. But its conversion of EBIT to free cash flow tells a very different story, and suggests some resilience. Looking at all the angles mentioned above, it does seem to us that Grupo Gigante S. A. B. de C. V is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Grupo Gigante S. A. B. de C. V (of which 1 is a bit concerning!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.