Grupo Aeroportuario del Centro Norte. de (BMV:OMAB) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

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

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

The image below, which you can click on for greater detail, shows that at June 2023 Grupo Aeroportuario del Centro Norte. de had debt of Mex$10.7b, up from Mex$8.99b in one year. However, it does have Mex$2.01b in cash offsetting this, leading to net debt of about Mex$8.67b.

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$3.04b due within a year, and liabilities of Mex$12.9b falling due after that. Offsetting this, it had Mex$2.01b in cash and Mex$1.75b in receivables that were due within 12 months. So its liabilities total Mex$12.2b 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$79.6b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

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.

With net debt sitting at just 1.1 times EBITDA, Grupo Aeroportuario del Centro Norte. de is arguably pretty conservatively geared. And it boasts interest cover of 8.1 times, which is more than adequate. On top of that, Grupo Aeroportuario del Centro Norte. de grew its EBIT by 44% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Grupo Aeroportuario del Centro Norte. de'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, 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. In the last three years, Grupo Aeroportuario del Centro Norte. de's free cash flow amounted to 45% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Happily, Grupo Aeroportuario del Centro Norte. de's impressive EBIT growth rate implies it has the upper hand on its debt. And its net debt to EBITDA is good too. It's also worth noting that Grupo Aeroportuario del Centro Norte. de is in the Infrastructure industry, which is often considered to be quite defensive. Looking at the bigger picture, we think Grupo Aeroportuario del Centro Norte. de's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return 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. For example - Grupo Aeroportuario del Centro Norte. de has 2 warning signs we think you should be aware of.

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.