Controladora Vuela Compañía de Aviación. de (BMV:VOLARA) Has A Somewhat Strained Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (BMV:VOLARA) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

See our latest analysis for Controladora Vuela Compañía de Aviación. de

How Much Debt Does Controladora Vuela Compañía de Aviación. de Carry?

You can click the graphic below for the historical numbers, but it shows that Controladora Vuela Compañía de Aviación. de had US$241.9m of debt in September 2022, down from US$258.6m, one year before. But on the other hand it also has US$750.0m in cash, leading to a US$508.1m net cash position.

A Look At Controladora Vuela Compañía de Aviación. de's Liabilities

According to the last reported balance sheet, Controladora Vuela Compañía de Aviación. de had liabilities of US$1.42b due within 12 months, and liabilities of US$2.75b due beyond 12 months. On the other hand, it had cash of US$750.0m and US$203.3m worth of receivables due within a year. So it has liabilities totalling US$3.21b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$1.32b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Controladora Vuela Compañía de Aviación. de would probably need a major re-capitalization if its creditors were to demand repayment. Given that Controladora Vuela Compañía de Aviación. de has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Shareholders should be aware that Controladora Vuela Compañía de Aviación. de's EBIT was down 55% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Controladora Vuela Compañía de Aviación. de can strengthen its balance sheet over time. 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. Controladora Vuela Compañía de Aviación. de may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Controladora Vuela Compañía de Aviación. de actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Controladora Vuela Compañía de Aviación. de does have more liabilities than liquid assets, it also has net cash of US$508.1m. The cherry on top was that in converted 177% of that EBIT to free cash flow, bringing in US$400m. Despite the cash, we do find Controladora Vuela Compañía de Aviación. de's level of total liabilities concerning, so we're not particularly comfortable with the stock. 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 Controladora Vuela Compañía de Aviación. de , 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.