Does Controladora Vuela Compañía de Aviación. de (BMV:VOLARA) Have A Healthy Balance Sheet?

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.' 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 note that Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (BMV:VOLARA) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

The image below, which you can click on for greater detail, shows that Controladora Vuela Compañía de Aviación. de had debt of US$242.0m at the end of March 2022, a reduction from US$268.0m over a year. However, it does have US$750.0m in cash offsetting this, leading to net cash of US$508.0m.

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

The latest balance sheet data shows that Controladora Vuela Compañía de Aviación. de had liabilities of US$1.33b due within a year, and liabilities of US$2.48b falling due after that. On the other hand, it had cash of US$750.0m and US$168.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$2.89b.

The deficiency here weighs heavily on the US$1.09b 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. After all, Controladora Vuela Compañía de Aviación. de would likely require a major re-capitalisation if it had to pay its creditors today. 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.

We also note that Controladora Vuela Compañía de Aviación. de improved its EBIT from a last year's loss to a positive US$416m. There's no doubt that we learn most about debt from the balance sheet. 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'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. 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. Happily for any shareholders, Controladora Vuela Compañía de Aviación. de actually produced more free cash flow than EBIT over the last year. 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$508.0m. The cherry on top was that in converted 182% of that EBIT to free cash flow, bringing in US$756m. So although we see some areas for improvement, we're not too worried about Controladora Vuela Compañía de Aviación. de's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. 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 .

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.