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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Grupo Aeroportuario del Centro Norte, S.A.B. de C.V. (BMV:OMAB) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See 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 September 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$2.22b in cash offsetting this, leading to net debt of about Mex$8.46b.

How Healthy Is Grupo Aeroportuario del Centro Norte. de's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Grupo Aeroportuario del Centro Norte. de had liabilities of Mex$2.53b due within 12 months and liabilities of Mex$13.0b due beyond that. On the other hand, it had cash of Mex$2.22b and Mex$1.84b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$11.5b.

Since publicly traded Grupo Aeroportuario del Centro Norte. de shares are worth a total of Mex$60.0b, 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 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 8.1 times the interest expense over the last year. On top of that, Grupo Aeroportuario del Centro Norte. de grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. 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 it's worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Grupo Aeroportuario del Centro Norte. de recorded free cash flow of 45% of its EBIT, which is weaker 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 we also thought its net debt to EBITDA was a positive. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Grupo Aeroportuario del Centro Norte. de (including 1 which is a bit unpleasant) .

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.