Is Industrias Bachoco. de (NYSE:IBA) Using Too Much Debt?
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital. So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Industrias Bachoco. de
What Is Industrias Bachoco. de's Debt?
The image below, which you can click on for greater detail, shows that Industrias Bachoco. de had debt of Mex$4.02b at the end of December 2019, a reduction from Mex$5.04b over a year. However, it does have Mex$19.2b in cash offsetting this, leading to net cash of Mex$15.2b.
How Healthy Is Industrias Bachoco. de's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Industrias Bachoco. de had liabilities of Mex$8.98b due within 12 months and liabilities of Mex$6.51b due beyond that. Offsetting this, it had Mex$19.2b in cash and Mex$3.88b in receivables that were due within 12 months. So it actually has Mex$7.57b more liquid assets than total liabilities.
This surplus suggests that Industrias Bachoco. de is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Industrias Bachoco. de has more cash than debt is arguably a good indication that it can manage its debt safely.
The good news is that Industrias Bachoco. de has increased its EBIT by 5.1% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Industrias Bachoco. de's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Industrias Bachoco. de may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Industrias Bachoco. de recorded free cash flow of 48% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Industrias Bachoco. de has net cash of Mex$15.2b, as well as more liquid assets than liabilities. And it also grew its EBIT by 5.1% over the last year. So we don't think Industrias Bachoco. de's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Industrias Bachoco. de , and understanding them should be part of your investment process.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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