These 4 Measures Indicate That Grupo Aeroportuario del Sureste S. A. B. de C. V (BMV:ASURB) Is Using Debt Safely

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. As with many other companies Grupo Aeroportuario del Sureste, S. A. B. de C. V. (BMV:ASURB) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

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

What Is Grupo Aeroportuario del Sureste S. A. B. de C. V's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Grupo Aeroportuario del Sureste S. A. B. de C. V had debt of Mex$13.1b, up from Mex$12.4b in one year. However, its balance sheet shows it holds Mex$14.5b in cash, so it actually has Mex$1.33b net cash.

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

The latest balance sheet data shows that Grupo Aeroportuario del Sureste S. A. B. de C. V had liabilities of Mex$7.81b due within a year, and liabilities of Mex$14.2b falling due after that. Offsetting this, it had Mex$14.5b in cash and Mex$4.17b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$3.39b.

Of course, Grupo Aeroportuario del Sureste S. A. B. de C. V has a market capitalization of Mex$116.8b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Grupo Aeroportuario del Sureste S. A. B. de C. V boasts net cash, so it's fair to say it does not have a heavy debt load!

Another good sign is that Grupo Aeroportuario del Sureste S. A. B. de C. V has been able to increase its EBIT by 22% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Grupo Aeroportuario del Sureste S. A. B. de C. V'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Grupo Aeroportuario del Sureste S. A. B. de C. V 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, Grupo Aeroportuario del Sureste S. A. B. de C. V recorded free cash flow worth 70% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

We could understand if investors are concerned about Grupo Aeroportuario del Sureste S. A. B. de C. V's liabilities, but we can be reassured by the fact it has has net cash of Mex$1.33b. And we liked the look of last year's 22% year-on-year EBIT growth. So we don't think Grupo Aeroportuario del Sureste S. A. B. de C. V's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Grupo Aeroportuario del Sureste S. A. B. de C. V you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.