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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Controladora Vuela Compañía de Aviación, S.A.B. de C.V. (BMV:VOLARA) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its 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?

The image below, which you can click on for greater detail, shows that at March 2023 Controladora Vuela Compañía de Aviación. de had debt of US$303.7m, up from US$241.9m in one year. But on the other hand it also has US$704.4m in cash, leading to a US$400.7m net cash position.

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$1.65b due within 12 months, and liabilities of US$2.85b due beyond 12 months. Offsetting these obligations, it had cash of US$704.4m as well as receivables valued at US$284.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$3.51b.

This deficit casts a shadow over the US$1.69b company, like a colossus towering over mere mortals. 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. 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.

The modesty of its debt load may become crucial for Controladora Vuela Compañía de Aviación. de if management cannot prevent a repeat of the 94% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. 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. 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. Over the last two years, Controladora Vuela Compañía de Aviación. de actually produced more free cash flow than EBIT. 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$400.7m. And it impressed us with free cash flow of US$197m, being 224% of its EBIT. Despite its cash we think that Controladora Vuela Compañía de Aviación. de seems to struggle to handle its total liabilities, so we are wary of the stock. 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. To that end, you should be aware of the 1 warning sign we've spotted with Controladora Vuela Compañía de Aviación. de .

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.