Here's Why Grupo Aeroportuario del Sureste S. A. B. de C. V (BMV:ASURB) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that Grupo Aeroportuario del Sureste, S. A. B. de C. V. (BMV:ASURB) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Grupo Aeroportuario del Sureste S. A. B. de C. V

How Much Debt Does Grupo Aeroportuario del Sureste S. A. B. de C. V Carry?

You can click the graphic below for the historical numbers, but it shows that Grupo Aeroportuario del Sureste S. A. B. de C. V had Mex$13.4b of debt in June 2021, down from Mex$15.5b, one year before. On the flip side, it has Mex$7.84b in cash leading to net debt of about Mex$5.59b.

How Strong Is Grupo Aeroportuario del Sureste S. A. B. de C. V's Balance Sheet?

We can see from the most recent balance sheet that Grupo Aeroportuario del Sureste S. A. B. de C. V had liabilities of Mex$5.65b falling due within a year, and liabilities of Mex$15.1b due beyond that. On the other hand, it had cash of Mex$7.84b and Mex$2.50b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$10.4b.

Given Grupo Aeroportuario del Sureste S. A. B. de C. V has a market capitalization of Mex$106.7b, 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.

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). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

With net debt sitting at just 0.85 times EBITDA, Grupo Aeroportuario del Sureste S. A. B. de C. V is arguably pretty conservatively geared. And this view is supported by the solid interest coverage, with EBIT coming in at 7.4 times the interest expense over the last year. On the other hand, Grupo Aeroportuario del Sureste S. A. B. de C. V's EBIT dived 18%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. 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 Aeroportuario del Sureste S. A. B. de C. V 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. Over the most recent three years, Grupo Aeroportuario del Sureste S. A. B. de C. V recorded free cash flow worth 63% 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.

Our View

Based on what we've seen Grupo Aeroportuario del Sureste S. A. B. de C. V is not finding it easy, given its EBIT growth rate, but the other factors we considered give us cause to be optimistic. In particular, we thought its net debt to EBITDA was a positive. We would also note that Infrastructure industry companies like Grupo Aeroportuario del Sureste S. A. B. de C. V commonly do use debt without problems. Considering this range of data points, we think Grupo Aeroportuario del Sureste S. A. B. de C. V is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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. Be aware that Grupo Aeroportuario del Sureste S. A. B. de C. V is showing 1 warning sign in our investment analysis , 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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