Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Above all, Grupo Minsa, SAB de CV (BMV: MINSAB) is in debt. But does this debt worry shareholders?
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies 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 flow and debt together.
Check out our latest analysis for Grupo Minsa. of
What is Grupo Minsa. debt ?
You can click on the graph below for historical figures, but it shows that Grupo Minsa. de had a debt of M $ 717.4 million in September 2021, up from M $ 1.05 billion a year earlier. However, it has Mexican $ 92.7 million in cash offsetting this, which leads to net debt of around Mexican $ 624.7 million.
How healthy is Grupo Minsa. the record of?
The most recent balance sheet shows that Grupo Minsa. de had a liability of M $ 1.07 billion maturing within one year and a liability of M $ 252.6 million beyond. On the other hand, he had cash of 92.7 million Mexican dollars and 1.50 billion Mexican dollars in receivables due within one year. So he actually has 270.3 million Mexican dollars Following liquid assets as total liabilities.
This surplus suggests that Grupo Minsa. de has a prudent balance sheet and could probably eliminate its debt without too much difficulty.
We measure a company’s indebtedness relative to its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating the ease with which its earnings before interest and taxes (EBIT ) covers its interests. costs (interest coverage). Thus, we consider debt versus earnings with and without amortization expenses.
Minsa Group. De’s net debt is 2.5 times its EBITDA, which represents significant leverage but still reasonable. But its EBIT was around 16.3 times its interest expense, implying that the company isn’t really paying a high cost to maintain that level of debt. Even if the low cost turned out to be unsustainable, that’s a good sign. Especially, Grupo Minsa. De’s EBIT has fallen 38% over the past twelve months. If this profit trend continues, paying off debt will be about as easy as driving cats on a roller coaster. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; from Grupo Minsa. de will need income to pay off this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.
Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. The logical step is therefore to examine the proportion of this EBIT that corresponds to the actual free cash flow. Over the past three years, Grupo Minsa. of burned a lot of money. While investors no doubt expect this situation to reverse in due course, this clearly means its use of debt is riskier.
Our point of view
Neither Grupo Minsa. de’s ability to increase its EBIT and its conversion of EBIT to free cash flow gave us confidence in its ability to take on more debt. But the good news is that he seems to be able to easily cover his interest charges with his EBIT. Taking the factors mentioned above together, we believe that Grupo Minsa. debt poses certain risks to the business. So while this leverage increases returns on equity, we wouldn’t really want to see it increase from here. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. For example – Grupo Minsa. from to 1 warning sign we think you should be aware.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
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 shares 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.
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