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

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

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

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

As you can see below, at the end of September 2023, Controladora Vuela Compañía de Aviación. de had US$567.0m of debt, up from US$241.9m a year ago. Click the image for more detail. However, it does have US$749.0m in cash offsetting this, leading to net cash of US$182.0m.

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$1.67b due within 12 months, and liabilities of US$3.21b due beyond 12 months. On the other hand, it had cash of US$749.0m and US$293.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.84b.

The deficiency here weighs heavily on the US$1.03b 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. Controladora Vuela Compañía de Aviación. de boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Shareholders should be aware that Controladora Vuela Compañía de Aviación. de's EBIT was down 32% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Controladora Vuela Compañía de Aviación. de'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.

Finally, while the tax-man may adore accounting profits, lenders only accept 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 three years, Controladora Vuela Compañía de Aviación. de actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Controladora Vuela Compañía de Aviación. de does have more liabilities than liquid assets, it also has net cash of US$182.0m. The cherry on top was that in converted 204% of that EBIT to free cash flow, bringing in US$327m. 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. For instance, we've identified 1 warning sign for Controladora Vuela Compañía de Aviación. de that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.