Yahoo Finance Industrias Bachoco. de (NYSE:IBA) Has A Rock Solid Balance Sheet
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Industrias Bachoco, S.A.B. de C.V. (NYSE:IBA) does carry debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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?
You can click the graphic below for the historical numbers, but it shows that Industrias Bachoco. de had Mex$1.85b of debt in September 2021, down from Mex$2.54b, one year before. But it also has Mex$20.1b in cash to offset that, meaning it has Mex$18.2b net cash.
How Strong Is Industrias Bachoco. de's Balance Sheet?
The latest balance sheet data shows that Industrias Bachoco. de had liabilities of Mex$10.4b due within a year, and liabilities of Mex$5.21b falling due after that. On the other hand, it had cash of Mex$20.1b and Mex$4.97b worth of receivables due within a year. So it actually has Mex$9.46b 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 190% over twelve months. That boost will make it even easier to pay down debt going forward. 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're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the most recent three years, Industrias Bachoco. de recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
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$18.2b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 190% over the last year. So is Industrias Bachoco. de's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Industrias Bachoco. de you should be aware of, and 1 of them is concerning.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
