Is Grupo Bafar. of (BMV: BAFARB) A risky investment?
Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from risk.” So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Mostly, Grupo Bafar, SAB de CV (BMV: BAFARB) is in debt. But should shareholders be concerned about its use of debt?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. 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. That said, the most common situation is where a business manages its debt reasonably well – and to its own advantage. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest analysis for Grupo Bafar. of
How much debt is Grupo Bafar. by Carry?
As you can see below, Grupo Bafar. de had Mexican $ 7.86 billion in debt in March 2021, which is roughly the same as the year before. You can click on the graph for more details. However, it has Mexican $ 437.7 million in cash offsetting this, which leads to net debt of around Mex $ 7.42 billion.
How strong is Grupo Bafar. the record of?
Zooming in on the latest balance sheet data, we can see that Grupo Bafar. de had a liability of M $ 4.34 billion due within 12 months and a liability of M $ 6.17 billion beyond. In compensation for these obligations, he had cash of Mex $ 437.7 million as well as receivables valued at Mex $ 2.92 billion maturing within 12 months. As a result, it has liabilities totaling Mexican $ 7.15 billion more than its cash and short-term receivables combined.
While that might sound like a lot, it’s not that bad since Grupo Bafar. de has a market capitalization of Mex $ 12.1 billion, and could therefore likely strengthen its balance sheet by raising capital if necessary. However, it’s always worth taking a close look at your ability to repay your debt.
In order to measure a company’s debt relative to its profits, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its profit before interest and taxes (EBIT) divided by its interest. debtors (its interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Bafar Group. Debt’s debt is 3.2 times its EBITDA, and its EBIT covers its interest expense 4.6 times more. This suggests that while debt levels are significant, we would stop calling them problematic. This Grupo Bafar is also relevant. de has increased its EBIT by a very respectable 24% over the past year, improving its ability to repay its debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the future profitability of the company will decide whether Grupo Bafar. de can strengthen its track record over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Grupo Bafar. de recorded negative free cash flow, in total. Debt is much riskier for companies with unreliable free cash flow, so shareholders should hope that past spending will produce free cash flow in the future.
Our point of view
Bafar Group. The conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we took into account cast it in a better light. For example, its EBIT growth rate was refreshing. Taking the aforementioned factors together, we believe that Grupo Bafar. debt poses certain risks to the business. So while this leverage increases returns on equity, we wouldn’t really want to see it increase from here. The balance sheet is clearly the area you need to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Grupo Bafar. of you should know.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page. free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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