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.' 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. We note that Grupo Aeroportuario del Pacífico, S.A.B. de C.V. (BMV:GAPB) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 Net Debt?

As you can see below, Grupo Aeroportuario del Pacífico. de had Mex$40.5b of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have Mex$11.5b in cash offsetting this, leading to net debt of about Mex$29.0b.

A Look At Grupo Aeroportuario del Pacífico. de's Liabilities

According to the last reported balance sheet, Grupo Aeroportuario del Pacífico. de had liabilities of Mex$12.8b due within 12 months, and liabilities of Mex$33.5b due beyond 12 months. On the other hand, it had cash of Mex$11.5b and Mex$4.02b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$30.8b.

Of course, Grupo Aeroportuario del Pacífico. de has a market capitalization of Mex$162.9b, 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.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Grupo Aeroportuario del Pacífico. de's net debt is sitting at a very reasonable 1.6 times its EBITDA, while its EBIT covered its interest expense just 7.0 times last year. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. The good news is that Grupo Aeroportuario del Pacífico. de has increased its EBIT by 2.1% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Looking at the most recent three years, Grupo Aeroportuario del Pacífico. de recorded free cash flow of 39% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Grupo Aeroportuario del Pacífico. de's interest cover was a real positive on this analysis, as was its net debt to EBITDA. Having said that, its conversion of EBIT to free cash flow somewhat sensitizes us to potential future risks to the balance sheet. It's also worth noting that Grupo Aeroportuario del Pacífico. de is in the Infrastructure industry, which is often considered to be quite defensive. When we consider all the elements mentioned above, it seems to us that Grupo Aeroportuario del Pacífico. de is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Grupo Aeroportuario del Pacífico. de , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.