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We Think Industrias Bachoco. de (NYSE:IBA) Can Manage Its Debt With Ease

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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Industrias Bachoco. de

What Is Industrias Bachoco. de's Net Debt?

The image below, which you can click on for greater detail, shows that Industrias Bachoco. de had debt of Mex$1.84b at the end of June 2021, a reduction from Mex$2.59b over a year. But it also has Mex$21.5b in cash to offset that, meaning it has Mex$19.6b net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Industrias Bachoco. de's Balance Sheet?

According to the last reported balance sheet, Industrias Bachoco. de had liabilities of Mex$8.53b due within 12 months, and liabilities of Mex$6.05b due beyond 12 months. On the other hand, it had cash of Mex$21.5b and Mex$4.52b worth of receivables due within a year. So it can boast Mex$11.4b more liquid assets than total liabilities.

This excess liquidity suggests that Industrias Bachoco. de is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any 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.

Even more impressive was the fact that Industrias Bachoco. de grew its EBIT by 258% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Industrias Bachoco. de can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Industrias Bachoco. de has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Industrias Bachoco. de recorded free cash flow worth 57% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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$19.6b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 258% 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Industrias Bachoco. de (of which 1 is potentially serious!) you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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