We Think Grupo Aeroportuario del Pacífico. de (BMV:GAPB) Can Stay On Top Of Its Debt

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 Grupo Aeroportuario del Pacífico, S.A.B. de C.V. (BMV:GAPB) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Aeroportuario del Pacífico. de

What Is Grupo Aeroportuario del Pacífico. de's Debt?

As you can see below, at the end of December 2024, Grupo Aeroportuario del Pacífico. de had Mex$45.5b of debt, up from Mex$40.6b a year ago. Click the image for more detail. However, because it has a cash reserve of Mex$13.5b, its net debt is less, at about Mex$32.0b.

How Strong Is Grupo Aeroportuario del Pacífico. de's Balance Sheet?

According to the last reported balance sheet, Grupo Aeroportuario del Pacífico. de had liabilities of Mex$11.6b due within 12 months, and liabilities of Mex$45.5b due beyond 12 months. On the other hand, it had cash of Mex$13.5b and Mex$2.70b worth of receivables due within a year. So it has liabilities totalling Mex$40.9b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Grupo Aeroportuario del Pacífico. de has a market capitalization of Mex$186.8b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (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).

Grupo Aeroportuario del Pacífico. de's net debt is sitting at a very reasonable 1.8 times its EBITDA, while its EBIT covered its interest expense just 5.3 times last year. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. Notably Grupo Aeroportuario del Pacífico. de's EBIT was pretty flat over the last year. We would prefer to see some earnings growth, because that always helps diminish debt. 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 Pacífico. 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.

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. In the last three years, Grupo Aeroportuario del Pacífico. de's free cash flow amounted to 37% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

We weren't impressed with Grupo Aeroportuario del Pacífico. de's EBIT growth rate, and its conversion of EBIT to free cash flow made us cautious. Balancing that a bit, it has a demonstrated ability net debt to EBITDA. It's also worth noting that Grupo Aeroportuario del Pacífico. de is in the Infrastructure industry, which is often considered to be quite defensive. Looking at all this data makes us feel a little cautious about Grupo Aeroportuario del Pacífico. de's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with Grupo Aeroportuario del Pacífico. de , and understanding them should be part of your investment process.

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.