Does Grupo Aeroportuario del Centro Norte. de (BMV:OMAB) Have A Healthy Balance Sheet?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (BMV:OMAB) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Grupo Aeroportuario del Centro Norte. de

What Is Grupo Aeroportuario del Centro Norte. de's Debt?

As you can see below, at the end of September 2021, Grupo Aeroportuario del Centro Norte. de had Mex$4.99b of debt, up from Mex$4.52b a year ago. Click the image for more detail. However, it also had Mex$4.68b in cash, and so its net debt is Mex$309.9m.

How Healthy Is Grupo Aeroportuario del Centro Norte. de's Balance Sheet?

The latest balance sheet data shows that Grupo Aeroportuario del Centro Norte. de had liabilities of Mex$1.88b due within a year, and liabilities of Mex$6.74b falling due after that. Offsetting this, it had Mex$4.68b in cash and Mex$1.50b in receivables that were due within 12 months. So its liabilities total Mex$2.44b more than the combination of its cash and short-term receivables.

Since publicly traded Grupo Aeroportuario del Centro Norte. de shares are worth a total of Mex$54.1b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Grupo Aeroportuario del Centro Norte. de has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Grupo Aeroportuario del Centro Norte. de has very modest net debt, giving rise to a debt to EBITDA ratio of 0.082. And EBIT easily covered the interest expense 8.8 times over, lending force to that view. In addition to that, we're happy to report that Grupo Aeroportuario del Centro Norte. de has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. 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 Centro Norte. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Grupo Aeroportuario del Centro Norte. de's free cash flow amounted to 48% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

The good news is that Grupo Aeroportuario del Centro Norte. de's demonstrated ability to grow its EBIT delights us like a fluffy puppy does a toddler. And that's just the beginning of the good news since its net debt to EBITDA is also very heartening. We would also note that Infrastructure industry companies like Grupo Aeroportuario del Centro Norte. de commonly do use debt without problems. Zooming out, Grupo Aeroportuario del Centro Norte. de seems to use debt quite reasonably; and that gets the nod from us. After all, sensible leverage can boost returns on equity. 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. Be aware that Grupo Aeroportuario del Centro Norte. de is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.