Is Coca-Cola FEMSA. de (NYSE:KOF) A Risky Investment?

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Coca-Cola FEMSA, S.A.B. de C.V. (NYSE:KOF) does carry debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Coca-Cola FEMSA. de

What Is Coca-Cola FEMSA. de's Debt?

You can click the graphic below for the historical numbers, but it shows that Coca-Cola FEMSA. de had Mex$78.9b of debt in March 2023, down from Mex$86.2b, one year before. However, it does have Mex$41.1b in cash offsetting this, leading to net debt of about Mex$37.8b.

How Strong Is Coca-Cola FEMSA. de's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Coca-Cola FEMSA. de had liabilities of Mex$68.8b due within 12 months and liabilities of Mex$85.5b due beyond that. On the other hand, it had cash of Mex$41.1b and Mex$19.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$94.0b.

While this might seem like a lot, it is not so bad since Coca-Cola FEMSA. de has a huge market capitalization of Mex$292.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Coca-Cola FEMSA. de has a low net debt to EBITDA ratio of only 0.96. And its EBIT easily covers its interest expense, being 16.7 times the size. So we're pretty relaxed about its super-conservative use of debt. The good news is that Coca-Cola FEMSA. de has increased its EBIT by 7.5% over twelve months, which should ease any concerns about debt repayment. 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 Coca-Cola FEMSA. 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the most recent three years, Coca-Cola FEMSA. de recorded free cash flow worth 79% 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.

Our View

Happily, Coca-Cola FEMSA. de's impressive interest cover implies it has the upper hand on its debt. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! Taking all this data into account, it seems to us that Coca-Cola FEMSA. de takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. Another positive for shareholders is that it pays dividends. So if you like receiving those dividend payments, check Coca-Cola FEMSA. de's dividend history, without delay!

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.