We Think Grupo Aeroportuario del Centro Norte. de (BMV:OMAB) Can Stay On Top Of Its Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. 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?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

As you can see below, at the end of June 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. On the flip side, it has Mex$1.76b in cash leading to net debt of about Mex$7.24b.

How Strong 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$4.25b due within 12 months and liabilities of Mex$9.32b due beyond that. Offsetting this, it had Mex$1.76b in cash and Mex$1.87b in receivables that were due within 12 months. So its liabilities total Mex$9.95b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Grupo Aeroportuario del Centro Norte. de is worth Mex$48.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

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). 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 1.3 times EBITDA, indicating that it is certainly not a reckless borrower. And it boasts interest cover of 9.4 times, which is more than adequate. Better yet, Grupo Aeroportuario del Centro Norte. de grew its EBIT by 108% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 41% 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 the good news does not stop there, as its interest cover 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. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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. For example, we've discovered 2 warning signs for Grupo Aeroportuario del Centro Norte. de that you should be aware of before investing here.

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.