Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We note that TV Azteca, SAB de CV (BMV:AZTECACPO) has debt on its balance sheet. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for TV Azteca. of
What is TV Azteca. debt ?
As you can see below, TV Azteca. de had a debt of 12.4 billion Mexican pesos in March 2022, roughly the same as the previous year. You can click on the graph for more details. However, he has 2.60 billion pesos of cash to offset this, resulting in a net debt of around 9.83 billion pesos.
How healthy is TV Azteca. Balance sheet of?
Zooming in on the latest balance sheet data, we can see that TV Azteca. de had liabilities of 21.7 billion pesos due within 12 months and liabilities of 3.26 billion pesos due beyond. On the other hand, it had a cash position of 2.60 billion Mexican pesos and 4.36 billion Mexican pesos of receivables due within one year. It therefore has liabilities totaling 18.0 billion pesos more than its cash and short-term receivables, combined.
This deficit casts a shadow over the company of 2.41 billion Mexican dollars, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. Ultimately, TV Azteca. de would likely need a significant recapitalization if its creditors demanded repayment.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). 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 ).
Aztec TV. Debt represents 2.6 times its EBITDA and its EBIT covers its interest charges 3.3 times. Taken together, this implies that, while we wouldn’t like to see debt levels increase, we think he can manage his current leverage. Looking on the bright side, TV Azteca. de has increased its EBIT by 72% over the past year. Like the milk of human kindness, this type of growth increases resilience, making the business more capable of managing debt. The balance sheet is clearly the area to focus on when analyzing debt. But it’s TV Azteca. the profits of which will influence the holding of the balance sheet in the future. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, TV Azteca. de generated free cash flow of a very strong 91% of its EBIT, more than we expected. This puts him in a very strong position to pay off the debt.
Our point of view
We feel some apprehension about TV Azteca. 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. Looking at all the angles mentioned above, it looks like TV Azteca to us. de is a somewhat risky investment due to its leverage. Not all risk is bad, as it can increase stock price returns if it pays off, but this leverage risk is worth keeping in mind. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example TV Azteca. from to 2 warning signs (and 1 which is potentially serious) that we think you should know about.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
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.