Is Controladora Vuela Compañía de Aviación. de (BMV:VOLARA) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (BMV:VOLARA) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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, 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Controladora Vuela Compañía de Aviación. de

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

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Controladora Vuela Compañía de Aviación. de had US$739.1m of debt, an increase on US$567.3m, over one year. But it also has US$830.5m in cash to offset that, meaning it has US$91.4m net cash.

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$1.77b due within 12 months, and liabilities of US$3.40b due beyond 12 months. Offsetting these obligations, it had cash of US$830.5m as well as receivables valued at US$171.2m due within 12 months. So it has liabilities totalling US$4.17b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$904.2m 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. 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.

Notably, Controladora Vuela Compañía de Aviación. de's EBIT launched higher than Elon Musk, gaining a whopping 353% on last year. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 three years. 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$91.4m. And it impressed us with free cash flow of US$401m, being 145% of its EBIT. So we don't have any problem with Controladora Vuela Compañía de Aviación. de's use of debt. 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 example Controladora Vuela Compañía de Aviación. de has 2 warning signs (and 1 which is concerning) we think you should know about.

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.