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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (BMV:VOLARA) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

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

How Much Debt Does Controladora Vuela Compañía de Aviación. de Carry?

As you can see below, Controladora Vuela Compañía de Aviación. de had Mex$5.30b of debt at September 2021, down from Mex$5.81b a year prior. But it also has Mex$12.7b in cash to offset that, meaning it has Mex$7.37b net cash.

A Look At Controladora Vuela Compañía de Aviación. de's Liabilities

The latest balance sheet data shows that Controladora Vuela Compañía de Aviación. de had liabilities of Mex$24.9b due within a year, and liabilities of Mex$45.7b falling due after that. Offsetting these obligations, it had cash of Mex$12.7b as well as receivables valued at Mex$2.79b due within 12 months. So its liabilities total Mex$55.2b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's Mex$42.8b market capitalization, you might well be inclined to review the balance sheet intently. 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. 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.

Notably, Controladora Vuela Compañía de Aviación. de made a loss at the EBIT level, last year, but improved that to positive EBIT of Mex$6.4b in the last twelve months. 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 company can only pay off debt with cold hard cash, not accounting profits. 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 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 Mex$7.37b. And it impressed us with free cash flow of Mex$8.6b, being 134% of its EBIT. So although we see some areas for improvement, we're not too worried about Controladora Vuela Compañía de Aviación. de's balance sheet. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Controladora Vuela Compañía de Aviación. de's earnings per share history for free.

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.