We Think El Puerto de Liverpool. de (BMV:LIVEPOLC-1) Can Manage Its Debt With Ease

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.' 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. Importantly, El Puerto de Liverpool, S.A.B. de C.V. (BMV:LIVEPOLC-1) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Net Debt?

You can click the graphic below for the historical numbers, but it shows that El Puerto de Liverpool. de had Mex$27.8b of debt in June 2023, down from Mex$31.7b, one year before. However, because it has a cash reserve of Mex$16.1b, its net debt is less, at about Mex$11.7b.

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

According to the last reported balance sheet, El Puerto de Liverpool. de had liabilities of Mex$46.4b due within 12 months, and liabilities of Mex$51.4b due beyond 12 months. Offsetting these obligations, it had cash of Mex$16.1b as well as receivables valued at Mex$41.5b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$40.1b.

El Puerto de Liverpool. de has a market capitalization of Mex$151.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without 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.

El Puerto de Liverpool. de has a low net debt to EBITDA ratio of only 0.39. And its EBIT covers its interest expense a whopping 12.6 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Also good is that El Puerto de Liverpool. de grew its EBIT at 17% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine El Puerto de Liverpool. de's ability to maintain a healthy balance sheet going forward. 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, El Puerto de Liverpool. de generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

El Puerto de Liverpool. de's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Zooming out, El Puerto de Liverpool. de seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. 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.

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.