Is Controladora Vuela Compañía de Aviación. de (BMV:VOLARA) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out 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 Mex$5.48b at the end of March 2021, a reduction from Mex$5.84b over a year. However, it does have Mex$8.72b in cash offsetting this, leading to net cash of Mex$3.24b.

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 Mex$22.5b due within 12 months and liabilities of Mex$43.9b due beyond that. Offsetting this, it had Mex$8.72b in cash and Mex$2.18b in receivables that were due within 12 months. So it has liabilities totalling Mex$55.5b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of Mex$45.9b, we think shareholders really should watch Controladora Vuela Compañía de Aviación. de's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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. 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're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Controladora Vuela Compañía de Aviación. de had a loss before interest and tax, and actually shrunk its revenue by 40%, to Mex$21b. That makes us nervous, to say the least.

So How Risky Is Controladora Vuela Compañía de Aviación. de?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Controladora Vuela Compañía de Aviación. de lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of Mex$728m and booked a Mex$3.5b accounting loss. Given it only has net cash of Mex$3.24b, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Controladora Vuela Compañía de Aviación. de that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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