Here’s why Alfa. of (BMV:ALFAA) has significant debt
Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Alfa, SAB de CV (BMV:ALFAA) uses debt in its business. But should shareholders worry about its use of debt?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great tool for companies 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.
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What is Alfa. debt ?
The table below, which you can click on for more details, shows that Alfa. de had a debt of 117.2 billion Mexican pesos in March 2022; about the same as the previous year. On the other hand, he has 25.8 billion Mexican dollars in cash, resulting in a net debt of approximately 91.4 billion Mexican dollars.
How healthy is Alfa. Balance sheet of?
The latest balance sheet data shows that Alfa. de had debts of 82.4 billion pesos maturing in the year, and debts of 127.9 billion pesos maturing thereafter. As compensation for these obligations, it had cash of 25.8 billion pesos as well as claims worth 39.9 billion pesos maturing within 12 months. It therefore has liabilities totaling 144.6 billion pesos more than its cash and short-term receivables, combined.
The deficiency here weighs heavily on the company itself, at 67.0 billion Mexican dollars, like a child struggling under the weight of a huge backpack full of books, sports equipment and equipment. a trumpet. We would therefore be watching his balance sheet closely, no doubt. After all, Alfa. would likely require a major recapitalization if it were to pay its creditors today.
We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
Alpha. Net debt is at a very reasonable 2.2 times its EBITDA, while its EBIT covered its interest expense at just 5.2 times last year. While that doesn’t worry us too much, it does suggest that interest payments are a bit of a burden. It should be noted that Alfa. de’s EBIT has jumped like bamboo after rain, gaining 49% over the last twelve months. This will make it easier to manage your debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Alfa. can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Alfa. de generated free cash flow of a very strong 94% of its EBIT, more than we expected. This positions him well to pay off debt if desired.
Our point of view
We feel some apprehension about Alfa. the difficulty level of de’s total passive, but we also have some positives to focus on. For example, its EBIT to free cash flow conversion and EBIT growth rate give us some confidence in its ability to manage its debt. We think Alfa. Debt makes it a bit risky, after looking at the aforementioned data points together. This isn’t necessarily a bad thing, since leverage can increase return on equity, but it is something to be aware of. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 2 warning signs for Alfa. of you should know.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.