These 4 Measures Indicate That Industrias Bachoco. de (NYSE:IBA) Is Using Debt Safely

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Industrias Bachoco. de

What Is Industrias Bachoco. de's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Industrias Bachoco. de had Mex$2.54b of debt in March 2021, down from Mex$4.37b, one year before. But it also has Mex$19.8b in cash to offset that, meaning it has Mex$17.3b net cash.

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

The latest balance sheet data shows that Industrias Bachoco. de had liabilities of Mex$7.26b due within a year, and liabilities of Mex$6.35b falling due after that. On the other hand, it had cash of Mex$19.8b and Mex$4.91b worth of receivables due within a year. So it actually has Mex$11.1b 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. 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.

On top of that, Industrias Bachoco. de grew its EBIT by 45% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 43% 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$17.3b, as well as more liquid assets than liabilities. And we liked the look of last year's 45% 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. Case in point: We've spotted 2 warning signs for Industrias Bachoco. de you should be aware of.

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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