We Think Promotora y Operadora de Infraestructura S. A. B. de C. V (BMV:PINFRA) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Promotora y Operadora de Infraestructura, S. A. B. de C. V. (BMV:PINFRA) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 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$15.4b in debt in March 2023; about the same as the year before. However, it does have Mex$24.1b in cash offsetting this, leading to net cash of Mex$8.68b.

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$5.51b due within 12 months, and liabilities of Mex$15.5b due beyond 12 months. Offsetting these obligations, it had cash of Mex$24.1b as well as receivables valued at Mex$1.11b due within 12 months. So it can boast Mex$4.23b 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!

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 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 most recent three years, Promotora y Operadora de Infraestructura S. A. B. de C. V recorded free cash flow worth 66% 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$8.68b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of Mex$4.9b, being 66% of its EBIT. So is Promotora y Operadora de Infraestructura S. A. B. de C. V's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 1 warning sign for Promotora y Operadora de Infraestructura S. A. B. de C. V that you should be aware of.

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.