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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. As with many other companies Promotora y Operadora de Infraestructura, S. A. B. de C. V. (BMV:PINFRA) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Promotora y Operadora de Infraestructura S. A. B. de C. V

What Is Promotora y Operadora de Infraestructura S. A. B. de C. V's Debt?

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 September 2023, a reduction from Mex$16.0b over a year. But on the other hand it also has Mex$25.5b in cash, leading to a Mex$10.6b net cash position.

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

According to the last reported balance sheet, Promotora y Operadora de Infraestructura S. A. B. de C. V had liabilities of Mex$5.26b due within 12 months, and liabilities of Mex$14.8b due beyond 12 months. Offsetting these obligations, it had cash of Mex$25.5b as well as receivables valued at Mex$1.05b due within 12 months. So it actually has Mex$6.52b more liquid assets than total liabilities.

This surplus suggests that Promotora y Operadora de Infraestructura S. A. B. de C. V has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

Also good is that Promotora y Operadora de Infraestructura S. A. B. de C. V grew its EBIT at 17% over the last year, further increasing its ability to manage debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

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 73% 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 we empathize with investors who find debt concerning, you should keep in mind that Promotora y Operadora de Infraestructura S. A. B. de C. V has net cash of Mex$10.6b, as well as more liquid assets than liabilities. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in Mex$10b. So is Promotora y Operadora de Infraestructura S. A. B. de C. V's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Promotora y Operadora de Infraestructura S. A. B. de C. V you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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