Here's Why Grupo Aeroportuario del Centro Norte. de (BMV:OMAB) Has A Meaningful Debt Burden

Warren Buffett famously said, '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. We note that Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (BMV:OMAB) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Grupo Aeroportuario del Centro Norte. de

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

As you can see below, Grupo Aeroportuario del Centro Norte. de had Mex$4.50b of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has Mex$3.35b in cash leading to net debt of about Mex$1.16b.

A Look At Grupo Aeroportuario del Centro Norte. de's Liabilities

Zooming in on the latest balance sheet data, we can see that Grupo Aeroportuario del Centro Norte. de had liabilities of Mex$4.32b due within 12 months and liabilities of Mex$3.15b due beyond that. Offsetting this, it had Mex$3.35b in cash and Mex$1.67b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$2.45b.

Since publicly traded Grupo Aeroportuario del Centro Norte. de shares are worth a total of Mex$50.6b, 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.

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).

While Grupo Aeroportuario del Centro Norte. de's low debt to EBITDA ratio of 0.70 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 3.6 times last year does give us pause. So we'd recommend keeping a close eye on the impact financing costs are having on the business. Shareholders should be aware that Grupo Aeroportuario del Centro Norte. de's EBIT was down 74% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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's not great, when it comes to paying down debt.

Our View

Grupo Aeroportuario del Centro Norte. de's EBIT growth rate was a real negative on this analysis, although the other factors we considered cast it in a significantly better light. In particular, its net debt to EBITDA was re-invigorating. We should also note that Infrastructure industry companies like Grupo Aeroportuario del Centro Norte. de commonly do use debt without problems. We think that Grupo Aeroportuario del Centro Norte. de's debt does make it a bit risky, after considering the aforementioned data points together. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Grupo Aeroportuario del Centro Norte. 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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