Does Industrias Bachoco. de (NYSE:IBA) Have A Healthy Balance Sheet?

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. We can see that Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Industrias Bachoco. de

What Is Industrias Bachoco. de's Debt?

You can click the graphic below for the historical numbers, but it shows that Industrias Bachoco. de had Mex$1.85b of debt in September 2021, down from Mex$2.54b, one year before. However, its balance sheet shows it holds Mex$20.1b in cash, so it actually has Mex$18.2b net cash.

How Healthy Is Industrias Bachoco. de's Balance Sheet?

We can see from the most recent balance sheet that Industrias Bachoco. de had liabilities of Mex$10.4b falling due within a year, and liabilities of Mex$5.21b due beyond that. Offsetting this, it had Mex$20.1b in cash and Mex$4.97b in receivables that were due within 12 months. So it actually has Mex$9.46b more liquid assets than total liabilities.

This excess liquidity suggests that Industrias Bachoco. de is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Simply put, the fact that Industrias Bachoco. de has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Industrias Bachoco. de grew its EBIT by 190% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Industrias Bachoco. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Industrias Bachoco. 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 most recent three years, Industrias Bachoco. de recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Industrias Bachoco. de has net cash of Mex$18.2b, as well as more liquid assets than liabilities. And we liked the look of last year's 190% year-on-year EBIT growth. So we don't think Industrias Bachoco. de's use of debt is risky. 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. We've identified 2 warning signs with Industrias Bachoco. de (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.