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

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. Importantly, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (BMV:OMAB) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. 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 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?

The image below, which you can click on for greater detail, shows that at December 2022 Grupo Aeroportuario del Centro Norte. de had debt of Mex$10.2b, up from Mex$7.81b in one year. However, it also had Mex$3.34b in cash, and so its net debt is Mex$6.85b.

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

According to the last reported balance sheet, Grupo Aeroportuario del Centro Norte. de had liabilities of Mex$5.26b due within 12 months, and liabilities of Mex$9.26b due beyond 12 months. Offsetting these obligations, it had cash of Mex$3.34b as well as receivables valued at Mex$1.53b due within 12 months. So it has liabilities totalling Mex$9.64b more than its cash and near-term receivables, combined.

Of course, Grupo Aeroportuario del Centro Norte. de has a market capitalization of Mex$76.3b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Grupo Aeroportuario del Centro Norte. de has net debt of just 1.0 times EBITDA, indicating that it is certainly not a reckless borrower. And this view is supported by the solid interest coverage, with EBIT coming in at 8.0 times the interest expense over the last year. On top of that, Grupo Aeroportuario del Centro Norte. de grew its EBIT by 48% 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 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 we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Grupo Aeroportuario del Centro Norte. de recorded free cash flow of 38% of its EBIT, which is weaker 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 suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. 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. 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. 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 1 warning sign for Grupo Aeroportuario del Centro Norte. de you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.