Promotora y Operadora de Infraestructura S. A. B. de C. V (BMV:PINFRA) Seems To Use Debt Quite Sensibly

Warren Buffett famously said, '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 note that Promotora y Operadora de Infraestructura, S. A. B. de C. V. (BMV:PINFRA) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out 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 Net Debt?

The chart below, which you can click on for greater detail, shows that Promotora y Operadora de Infraestructura S. A. B. de C. V had Mex$16.2b in debt in September 2021; about the same as the year before. But it also has Mex$28.0b in cash to offset that, meaning it has Mex$11.8b net cash.

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

We can see from the most recent balance sheet that Promotora y Operadora de Infraestructura S. A. B. de C. V had liabilities of Mex$5.11b falling due within a year, and liabilities of Mex$17.5b due beyond that. Offsetting these obligations, it had cash of Mex$28.0b as well as receivables valued at Mex$1.66b due within 12 months. So it can boast Mex$7.02b 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 top of that, Promotora y Operadora de Infraestructura S. A. B. de C. V grew its EBIT by 30% over the last twelve months, and that growth will make it easier to handle its debt. 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'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. During the last three years, Promotora y Operadora de Infraestructura S. A. B. de C. V burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

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$11.8b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 30% over the last year. So we don't think Promotora y Operadora de Infraestructura S. A. B. de C. V's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Promotora y Operadora de Infraestructura S. A. B. de C. V's earnings per share history for free.

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. 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.