Grupo Sanborns. de (BMV:GSANBORB-1) Seems To Use Debt Quite Sensibly

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Grupo Sanborns, S.A.B. de C.V. (BMV:GSANBORB-1) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Grupo Sanborns. de

What Is Grupo Sanborns. de's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Grupo Sanborns. de had Mex$500.0m of debt, an increase on none, over 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

According to the last reported balance sheet, Grupo Sanborns. de had liabilities of Mex$10.9b due within 12 months, and liabilities of Mex$6.07b due beyond 12 months. On the other hand, it had cash of Mex$2.68b and Mex$9.60b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$4.73b.

Given Grupo Sanborns. de has a market capitalization of Mex$40.7b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Grupo Sanborns. de can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

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. Over the last three years, Grupo Sanborns. de actually produced more free cash flow than EBIT. 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 don't have any problem with Grupo Sanborns. de's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Grupo Sanborns. de you should be aware of.

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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