These 4 measurements indicate that ALPEK. de (BMV: ALPEKA) uses its debt reasonably well
Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. 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 can see that ALPEK, SAB de CV (BMV: ALPEKA) uses debt in its business. But the more important question is: what risk does this debt create?
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. If things go really bad, lenders can take over the business. 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. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for ALPEK. of
What is ALPEK. net debt?
As you can see below, ALPEK. de had a debt of 30.9 billion Mexican pesos in March 2022, roughly the same as the previous year. You can click on the graph for more details. However, he also had 8.35 billion pesos in cash, so his net debt is 22.5 billion pesos.
How strong is ALPEK. Balance sheet of?
We can see in the most recent balance sheet that ALPEK. de had liabilities of 35.9 billion pesos maturing within one year and liabilities of 37.9 billion pesos due beyond. In return, it had 8.35 billion pesos in cash and 26.6 billion pesos in debt due within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 38.9 billion Mexican pesos.
This is a mountain of leverage compared to its market capitalization of 58.0 billion Mexican pesos. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly.
We measure a company’s leverage against its earning power 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 charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
ALPEK. de has a low net debt to EBITDA ratio of just 0.91. And its EBIT easily covers its interest charges, being 14.5 times higher. One could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, ALPEK. de has grown its EBIT by 94% over the last twelve months, and this growth will make it easier to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether ALPEK. can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, while the taxman may love accounting profits, lenders only accept cash. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years, ALPEK. de produced strong free cash flow equivalent to 66% of its EBIT, which is what we expected. This free cash flow puts the company in a good position to repay its debt, should it arise.
Our point of view
The good news is that ALPEK. De’s demonstrated ability to cover its interest costs with its EBIT delights us like a fluffy puppy does a toddler. But truth be told, we think his total passive level undermines that impression a bit. When we consider the range of factors above, it looks like ALPEK. de is quite reasonable with its use of debt. While this carries some risk, it can also improve shareholder returns. 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. Know that ALPEK. watch 3 warning signs in our investment analysis and 1 of them is a little unpleasant…
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeright now.
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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.