Is El Puerto de Liverpool. de (BMV:LIVEPOLC-1) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that El Puerto de Liverpool, S.A.B. de C.V. (BMV:LIVEPOLC-1) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for El Puerto de Liverpool. de

What Is El Puerto de Liverpool. de's Debt?

The image below, which you can click on for greater detail, shows that El Puerto de Liverpool. de had debt of Mex$28.3b at the end of December 2023, a reduction from Mex$29.7b over a year. However, its balance sheet shows it holds Mex$29.8b in cash, so it actually has Mex$1.51b net cash.

How Strong Is El Puerto de Liverpool. de's Balance Sheet?

We can see from the most recent balance sheet that El Puerto de Liverpool. de had liabilities of Mex$64.6b falling due within a year, and liabilities of Mex$47.1b due beyond that. On the other hand, it had cash of Mex$29.8b and Mex$50.4b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$31.4b.

Of course, El Puerto de Liverpool. de has a titanic market capitalization of Mex$180.9b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, El Puerto de Liverpool. de also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that El Puerto de Liverpool. de grew its EBIT by 15% last year, making its debt load easier to handle. 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 El Puerto de Liverpool. 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. While El Puerto de Liverpool. 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 most recent three years, El Puerto de Liverpool. de recorded free cash flow worth 64% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although El Puerto de Liverpool. de's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of Mex$1.51b. So is El Puerto de Liverpool. de's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of El Puerto de Liverpool. de's earnings per share history for free.

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. 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.