Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the possibility that you will suffer a permanent loss of capital.” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We can see that CMR, SAB de CV (BMV: CMRB) uses debt in his business. But should shareholders be concerned about its use of debt?
What risk does debt entail?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, then it exists at their mercy. If things really go wrong, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
See our latest analysis for CMR. of
What is CMR. debt ?
You can click on the graph below for historical figures, but it shows as of September 2021 CMR. de had a debt of M $ 1.71 billion, an increase from M $ 1.50 billion, year on year. However, given that it has a cash reserve of Mex $ 419.4 million, its net debt is less, at around Mex $ 1.30 billion.
How healthy is RMC. the balance sheet of?
By zooming in on the latest balance sheet data, we can see that CMR. de had a liability of M $ 1.27 billion due within 12 months and a liability of M $ 1.95 billion beyond. In return, he had M $ 419.4 million in cash and M $ 225.7 million in receivables due within 12 months. Its liabilities therefore total Mex 2.58 billion more than the combination of its cash and short-term receivables.
The lack here weighs heavily on the $ 870.9 million Mexican company itself, as if a child struggles under the weight of a huge backpack full of books, his gym equipment and a trumpet. We would therefore monitor its record closely, without a doubt. After all, CMR. de would likely need a major recapitalization if it were to pay its creditors today. The balance sheet is clearly the area to focus on when analyzing debt. But it’s CMR. the profits of which will influence the maintenance of the balance sheet in the future. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Over 12 months, CMR. de has seen his income hold fairly steady, and he has not reported any positive earnings before interest and taxes. While that doesn’t impress much, it’s not too bad either.
During the last twelve months CMR. produces earnings before interest and taxes (EBIT). Indeed, it lost 34 million Mexican dollars at the EBIT level. The combination of this information with the significant liabilities that we have already mentioned makes us very hesitant to say the least about this stock. Of course, he might be able to improve his situation with a little luck and a good execution. Nonetheless, we wouldn’t bet on that given that he has lost Mexican $ 449 million in the past twelve months and doesn’t have a lot of cash. So while it is unwise to assume that the business will fail, we believe it is risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist off the balance sheet. For example, we have identified 2 warning signs for CMR. of (1 is potentially serious) you should be aware of.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash-flow net-growth stocks.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.