Legendary fund manager Li Lu (whom Charlie Munger supported) once said, “The biggest risk in investing is not price volatility, but the fact that you suffer a permanent loss of capital. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. We notice that Megacable Holdings, SAB de CV (BMV: MEGACPO) has debt on its balance sheet. But does this debt worry shareholders?
What risk does debt entail?
Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
See our latest review for C. V’s Megacable Holdings SAB
What is the debt of Megacable Holdings SAB de C. V?
You can click on the graph below for historical figures, but it shows that C. V’s Megacable Holdings SAB had a debt of Mex 7.22 billion in March 2021, up from Mex 8.03 billion a year earlier. However, he has Mexican $ 4.83 billion in cash to make up for this, which leads to net debt of around Mexican $ 2.39 billion.
How healthy is the balance sheet of Megacable Holdings SAB de C. V?
We can see from the most recent balance sheet that C. V’s Megacable Holdings SAB had a liability of Mex 5.93 billion maturing within one year and a liability of Mex 9.38 billion beyond. . In return, he had Mex $ 4.83 billion in cash and Mex $ 2.27 billion in receivables due within 12 months. As a result, it has liabilities totaling Mexican $ 8.21 billion more than its cash and short-term receivables combined.
Given that C. V’s Megacable Holdings SAB has a market cap of Mexican $ 60.6 billion, it’s hard to believe that these liabilities pose a significant threat. But there are enough liabilities that we would certainly recommend that shareholders continue to monitor the balance sheet going forward.
We measure a company’s debt load relative to its earning capacity 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 costs (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Megacable Holdings SAB de CV’s net debt is only 0.21 times its EBITDA. And its EBIT easily covers its interest costs, being 11.9 times greater. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. Fortunately, C. V’s Megacable Holdings SAB has increased its EBIT by 4.6% over the past year, making this leverage even more manageable. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine the ability of Megacable Holdings SAB de CV to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business can only pay off its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, Megacable Holdings SAB de CV has recorded free cash flow of 50% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This hard cash allows him to reduce his debt whenever he wants.
Our point of view
Fortunately, the impressive interest coverage of C. V’s Megacable Holdings SAB means that it has the upper hand on its debt. And this is only the beginning of the good news since its net debt to EBITDA is also very encouraging. Considering all of this data, it seems to us that C. V’s Megacable Holdings SAB is taking a pretty sane approach to debt. While this carries some risk, it can also improve returns for shareholders. 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. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Megacable Holdings SAB by C. V you should know.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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This Simply Wall St article is general in nature. 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 the mentioned stocks.
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