Is Grupo Aeroportuario del Centro Norte. de (BMV:OMAB) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. 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 real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its 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 Debt?

As you can see below, at the end of September 2022, Grupo Aeroportuario del Centro Norte. de had Mex$8.99b of debt, up from Mex$4.99b a year ago. Click the image for more detail. However, it does have Mex$2.07b in cash offsetting this, leading to net debt of about Mex$6.92b.

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

The latest balance sheet data shows that Grupo Aeroportuario del Centro Norte. de had liabilities of Mex$4.09b due within a year, and liabilities of Mex$9.27b falling due after that. Offsetting this, it had Mex$2.07b in cash and Mex$1.65b in receivables that were due within 12 months. So it has liabilities totalling Mex$9.64b more than its cash and near-term receivables, combined.

Since publicly traded Grupo Aeroportuario del Centro Norte. de shares are worth a total of Mex$65.8b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Grupo Aeroportuario del Centro Norte. de has net debt of just 1.1 times EBITDA, indicating that it is certainly not a reckless borrower. And it boasts interest cover of 8.5 times, which is more than adequate. In addition to that, we're happy to report that Grupo Aeroportuario del Centro Norte. de has boosted its EBIT by 66%, thus reducing the spectre of future debt repayments. 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 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. Looking at the most recent three years, Grupo Aeroportuario del Centro Norte. de recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 interest cover 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. 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. After all, sensible leverage can boost returns on equity. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Grupo Aeroportuario del Centro Norte. de 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.