Here's Why Grupo Aeroportuario del Centro Norte. de (BMV:OMAB) Can Manage Its Debt Responsibly

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.' 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. As with many other companies Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (BMV:OMAB) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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

How Much Debt Does Grupo Aeroportuario del Centro Norte. de Carry?

The chart below, which you can click on for greater detail, shows that Grupo Aeroportuario del Centro Norte. de had Mex$10.7b in debt in December 2023; about the same as the year before. However, it also had Mex$2.58b in cash, and so its net debt is Mex$8.10b.

How Strong 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$2.47b due within a year, and liabilities of Mex$12.9b falling due after that. On the other hand, it had cash of Mex$2.58b and Mex$1.73b worth of receivables due within a year. So its liabilities total Mex$11.1b more than the combination of its cash and short-term receivables.

Of course, Grupo Aeroportuario del Centro Norte. de has a market capitalization of Mex$59.6b, 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). 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).

With net debt sitting at just 0.93 times EBITDA, Grupo Aeroportuario del Centro Norte. de is arguably pretty conservatively geared. And it boasts interest cover of 8.3 times, which is more than adequate. On top of that, Grupo Aeroportuario del Centro Norte. de grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Looking at the most recent three years, Grupo Aeroportuario del Centro Norte. de recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Our View

Happily, Grupo Aeroportuario del Centro Norte. de's impressive EBIT growth rate implies it has the upper hand on its debt. And the good news does not stop there, as its net debt to EBITDA also supports that impression! We would also note that Infrastructure industry companies like Grupo Aeroportuario del Centro Norte. de commonly do use debt without problems. When we consider the range of factors above, it looks like Grupo Aeroportuario del Centro Norte. de is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Grupo Aeroportuario del Centro Norte. de you should be aware of.

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.