Does Grupo Aeroportuario del Pacífico. of (BMV: GAPB) Have a healthy balance sheet?
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. So it can be obvious that you need to consider debt, when you think about how risky a given stock is, because too much debt can sink a business. Mostly, Grupo Aeroportuario del Pacífico, SAB de CV (BMV: GAPB) carries the debt. But should shareholders be concerned about its use of debt?
When is debt dangerous?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we look at debt levels, we first consider both liquidity and debt levels.
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What is the Grupo Aeroportuario del Pacífico. debt ?
As you can see below, at the end of March 2021, Grupo Aeroportuario del Pacífico. de had Mexican $ 24.5 billion in debt, up from Mexican $ 18.3 billion a year ago. Click on the image for more details. On the other hand, he has 14.7 billion Mexican dollars in cash, resulting in net debt of around 9.80 billion Mexican dollars.
How strong is the Grupo Aeroportuario del Pacífico. the record of?
According to the latest report published, Grupo Aeroportuario del Pacífico. de had a liability of M $ 5.99 billion due within 12 months and a liability of M $ 22.1 billion due beyond 12 months. On the other hand, he had a cash position of M $ 14.7 billion and M $ 2.48 billion in receivables due within one year. Its liabilities are therefore Mex 10.9 billion more than the combination of its cash and short-term receivables.
Of course, Grupo Aeroportuario del Pacífico. de has a market capitalization of Mex $ 117.5 billion, so this liability is likely manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet as it can change over time.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
Even though Grupo Aeroportuario del Pacífico. de’s debt is only 2.1, its interest coverage is really very low at 2.4. This makes us wonder if the company pays high interest because it is considered risky. Either way, it’s safe to say that the business has significant debt. Above all, Grupo Aeroportuario del Pacífico. De’s EBIT has fallen 67% over the past twelve months. If this earnings trend continues, paying off debt will be about as easy as driving cats on a roller coaster. There is no doubt that we learn the most about debt from the balance sheet. But it is the future profits, more than anything, that will determine Grupo Aeroportuario del Pacífico. the ability to maintain a healthy balance sheet in the future. So, if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business can only pay off its debts with hard cash, not with book profits. It is therefore worth checking to what extent this EBIT is supported by free cash flow. During the past three years, Grupo Aeroportuario del Pacífico. de recorded free cash flow of 56% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.
Our point of view
Grupo Aeroportuario del Pacífico. De’s EBIT growth rate was really negative in this analysis, although the other factors we took into account cast it in a much better light. But on the bright side, its ability to convert EBIT into free cash flow is not at all shabby. It should also be noted that Grupo Aeroportuario del Pacífico. de is in the Infrastructure sector, which is often seen as quite defensive. Looking at all the angles mentioned above, it seems to us that Grupo Aeroportuario del Pacífico. de is a somewhat risky investment due to its debt load. This isn’t necessarily a bad thing, as leverage can increase returns on equity, but it’s something to be aware of. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 3 warning signs for Grupo Aeroportuario del Pacífico. of (1 of which should not be ignored!) that you should know.
At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.
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