Does Grupo Sanborns. de (BMV:GSANBORB-1) Have A Healthy Balance Sheet?

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. We note that Grupo Sanborns, S.A.B. de C.V. (BMV:GSANBORB-1) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Grupo Sanborns. de

How Much Debt Does Grupo Sanborns. de Carry?

The image below, which you can click on for greater detail, shows that at September 2020 Grupo Sanborns. de had debt of Mex$500.0m, up from none in one year. However, it does have Mex$2.68b in cash offsetting this, leading to net cash of Mex$2.18b.

A Look At Grupo Sanborns. de's Liabilities

The latest balance sheet data shows that Grupo Sanborns. de had liabilities of Mex$10.9b due within a year, and liabilities of Mex$6.07b falling due after that. On the other hand, it had cash of Mex$2.68b and Mex$9.60b worth of receivables due within a year. So it has liabilities totalling Mex$4.73b more than its cash and near-term receivables, combined.

Since publicly traded Grupo Sanborns. de shares are worth a total of Mex$41.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Grupo Sanborns. de boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Grupo Sanborns. de's EBIT fell a jaw-dropping 53% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Grupo Sanborns. de'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. While Grupo Sanborns. de has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Grupo Sanborns. de 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.

Summing up

While Grupo Sanborns. de does have more liabilities than liquid assets, it also has net cash of Mex$2.18b. And it impressed us with free cash flow of Mex$3.9b, being 105% of its EBIT. So we are not troubled with Grupo Sanborns. de's debt use. 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. To that end, you should be aware of the 2 warning signs we've spotted with Grupo Sanborns. de .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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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