Controladora Vuela Compañía de Aviación. de (BMV:VOLARA) Takes On Some Risk With Its Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. 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?

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Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Controladora Vuela Compañía de Aviación. de's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2025 Controladora Vuela Compañía de Aviación. de had US$741.5m of debt, an increase on US$638.1m, over one year. But on the other hand it also has US$789.0m in cash, leading to a US$47.6m net cash position.

How Healthy Is Controladora Vuela Compañía de Aviación. de's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Controladora Vuela Compañía de Aviación. de had liabilities of US$1.94b due within 12 months and liabilities of US$3.42b due beyond that. Offsetting these obligations, it had cash of US$789.0m as well as receivables valued at US$229.9m due within 12 months. So its liabilities total US$4.34b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$823.3m 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'd watch its balance sheet closely, without a doubt. 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.

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

Importantly, Controladora Vuela Compañía de Aviación. de's EBIT fell a jaw-dropping 51% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Controladora Vuela Compañía de Aviación. de 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. Happily for any shareholders, Controladora Vuela Compañía de Aviación. de actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Controladora Vuela Compañía de Aviación. de's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$47.6m. And it impressed us with free cash flow of US$422m, being 150% of its EBIT. 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. 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. To that end, you should be aware of the 1 warning sign we've spotted with Controladora Vuela Compañía de Aviación. de .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.