Is Promotora y Operadora de Infraestructura S. A. B. de C. V (BMV:PINFRA) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Promotora y Operadora de Infraestructura, S. A. B. de C. V. (BMV:PINFRA) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. 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 Promotora y Operadora de Infraestructura S. A. B. de C. V

How Much Debt Does Promotora y Operadora de Infraestructura S. A. B. de C. V Carry?

As you can see below, Promotora y Operadora de Infraestructura S. A. B. de C. V had Mex$16.5b of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has Mex$27.7b in cash, leading to a Mex$11.2b net cash position.

How Strong Is Promotora y Operadora de Infraestructura S. A. B. de C. V's Balance Sheet?

The latest balance sheet data shows that Promotora y Operadora de Infraestructura S. A. B. de C. V had liabilities of Mex$3.76b due within a year, and liabilities of Mex$17.9b falling due after that. Offsetting these obligations, it had cash of Mex$27.7b as well as receivables valued at Mex$1.47b due within 12 months. So it can boast Mex$7.51b more liquid assets than total liabilities.

This short term liquidity is a sign that Promotora y Operadora de Infraestructura S. A. B. de C. V could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Promotora y Operadora de Infraestructura S. A. B. de C. V has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, Promotora y Operadora de Infraestructura S. A. B. de C. V's EBIT dived 19%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Promotora y Operadora de Infraestructura S. A. B. de C. V'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Promotora y Operadora de Infraestructura S. A. B. de C. V has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Promotora y Operadora de Infraestructura S. A. B. de C. V reported free cash flow worth 17% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While it is always sensible to investigate a company's debt, in this case Promotora y Operadora de Infraestructura S. A. B. de C. V has Mex$11.2b in net cash and a decent-looking balance sheet. So we are not troubled with Promotora y Operadora de Infraestructura S. A. B. de C. V's debt use. 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. We've identified 1 warning sign with Promotora y Operadora de Infraestructura S. A. B. de C. V , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. 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.
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