Is Coca-Cola FEMSA. by (NYSE:KOF) Using too much debt?
Warren Buffett said: “Volatility is far from synonymous with risk. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Mostly, Coca-Cola FEMSA, SAB de CV (NYSE:KOF) is in debt. But should shareholders worry about its use of debt?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. If things go really bad, lenders can take over the business. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Check out our latest analysis for Coca-Cola FEMSA. of
What is Coca-Cola FEMSA. debt ?
As you can see below, Coca-Cola FEMSA. de had a debt of 85.8 billion Mexican dollars in December 2021, roughly the same as the previous year. You can click on the graph for more details. However, since it has a cash reserve of 47.2 billion Mexican pesos, its net debt is less, at around 38.5 billion Mexican pesos.
How healthy is Coca-Cola FEMSA. Balance sheet of?
According to the latest published balance sheet, Coca-Cola FEMSA. de had liabilities of 46.2 billion pesos due within 12 months and liabilities of 97.8 billion pesos over 12 months. As compensation for these obligations, it had cash of 47.2 billion pesos as well as receivables worth 13.0 billion dollars maturing within 12 months. Thus, its liabilities outweigh the sum of its cash and (short-term) receivables of 83.7 billion Mexican pesos.
While that might sound like a lot, it’s not been so bad since Coca-Cola FEMSA. de has a huge market capitalization of 226.1 billion Mexican pesos and could therefore probably strengthen its balance sheet by raising capital if necessary. But it is clear that it is essential to examine closely whether it can manage its debt without dilution.
We use two main ratios to inform us about debt to earnings levels. The first is net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA), while the second is how often its earnings before interest and taxes (EBIT) covers its interest expense (or its interests, for short). The advantage of this approach is that we consider both the absolute amount of debt (with net debt to EBITDA) and the actual interest expense associated with that debt (with its interest coverage ratio ).
While Coca-Cola FEMSA. The low debt to EBITDA ratio of 1.0 suggests modest use of debt, the fact that EBIT covered interest charges only 5.2 times last year gives us pause. But the interest payments are certainly enough to make us think about the affordability of its debt. We saw Coca-Cola FEMSA. to grow its EBIT by 8.0% over the last twelve months. While that barely brings us down, it’s a positive when it comes to debt. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Coca-Cola FEMSA. 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, Coca-Cola FEMSA. de recorded free cash flow worth 87% of its EBIT, which is higher than what we usually expect. This puts him in a very strong position to pay off the debt.
Our point of view
Fortunately, Coca-Cola FEMSA. The impressive conversion of EBIT to free cash flow from implies that it has the upper hand on its debt. And its net debt to EBITDA ratio is also good. Looking at all the above factors together, it seems to us that Coca-Cola FEMSA. can manage his debt quite comfortably. On the plus side, this leverage can increase shareholder returns, but the potential downside is greater risk of loss, so it’s worth keeping an eye on the balance sheet. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example – Coca-Cola FEMSA. from to 1 warning sign we think you should know.
If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.
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