Promotora y Operadora de Infraestructura S. A. B. de C. V (BMV:PINFRA) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Promotora y Operadora de Infraestructura, S. A. B. de C. V. (BMV:PINFRA) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 step when considering a company's debt levels is to consider its cash and debt together.

View 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?

The image below, which you can click on for greater detail, shows that Promotora y Operadora de Infraestructura S. A. B. de C. V had debt of Mex$15.0b at the end of June 2023, a reduction from Mex$15.9b over a year. But it also has Mex$23.2b in cash to offset that, meaning it has Mex$8.13b net cash.

How Healthy 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$5.22b due within a year, and liabilities of Mex$14.9b falling due after that. Offsetting this, it had Mex$23.2b in cash and Mex$1.13b in receivables that were due within 12 months. So it actually has Mex$4.15b 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. Succinctly put, Promotora y Operadora de Infraestructura S. A. B. de C. V boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that Promotora y Operadora de Infraestructura S. A. B. de C. V grew its EBIT by 17% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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 most recent three years, Promotora y Operadora de Infraestructura S. A. B. de C. V recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

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$8.13b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in Mex$9.5b. So is Promotora y Operadora de Infraestructura S. A. B. de C. V's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. 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.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.