Is Industrias Bachoco. de (NYSE:IBA) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Industrias Bachoco. de

What Is Industrias Bachoco. de's Debt?

The image below, which you can click on for greater detail, shows that Industrias Bachoco. de had debt of Mex$2.52b at the end of December 2020, a reduction from Mex$4.93b over a year. But on the other hand it also has Mex$19.2b in cash, leading to a Mex$16.7b net cash position.

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

The latest balance sheet data shows that Industrias Bachoco. de had liabilities of Mex$8.00b due within a year, and liabilities of Mex$6.38b falling due after that. Offsetting this, it had Mex$19.2b in cash and Mex$4.56b in receivables that were due within 12 months. So it can boast Mex$9.42b more liquid assets than total liabilities.

It's good to see that Industrias Bachoco. de has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Industrias Bachoco. de boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Industrias Bachoco. de has increased its EBIT by 7.7% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Industrias Bachoco. de's ability to maintain a healthy balance sheet going forward. 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 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. In the last three years, Industrias Bachoco. de's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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$16.7b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 7.7% in the last twelve months. 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Industrias Bachoco. 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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