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

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. 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?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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, at the end of December 2021, Controladora Vuela Compañía de Aviación. de had Mex$6.28b of debt, up from Mex$5.35b a year ago. Click the image for more detail. However, its balance sheet shows it holds Mex$15.3b in cash, so it actually has Mex$8.98b net cash.

How Strong 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$25.8b due within 12 months and liabilities of Mex$49.8b due beyond that. Offsetting these obligations, it had cash of Mex$15.3b as well as receivables valued at Mex$2.18b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$58.1b.

When you consider that this deficiency exceeds the company's Mex$43.2b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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.

It was also good to see that despite losing money on the EBIT line last year, Controladora Vuela Compañía de Aviación. de turned things around in the last 12 months, delivering and EBIT of Mex$8.1b. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing up

While Controladora Vuela Compañía de Aviación. de does have more liabilities than liquid assets, it also has net cash of Mex$8.98b. And it impressed us with free cash flow of Mex$12b, being 147% of its EBIT. So we are not troubled with Controladora Vuela Compañía de Aviación. de's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Controladora Vuela Compañía de Aviación. de is showing 1 warning sign in our investment analysis , 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.