Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. Like many other companies Kimberly-Clark de México, SAB de CV (BMV: KIMBERA) uses debt. But the most important question is: what risk does this debt create?
When is Debt a Problem?
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. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash flow and debt together.
Check out our latest review for Kimberly-Clark de México SAB de C. V
What is the net debt of Kimberly-Clark de México SAB de C. V?
The image below, which you can click for more details, shows that Kimberly-Clark of México SAB de C. V had a debt of Mex 28.6 billion at the end of September 2021, a reduction from 37, 8 billion Mex over one year. However, because it has a cash reserve of Mex 14.3 billion, its net debt is less, at around Mex 14.3 billion.
A look at Kimberly-Clark’s liabilities from México SAB de C. V
According to the latest published balance sheet, Kimberly-Clark de México SAB de C. V had liabilities of M $ 17.4 billion due within 12 months and liabilities of M $ 28.2 billion due beyond 12 months. . In compensation for these obligations, he had cash of 14.3 billion Mexican dollars as well as receivables valued at 6.97 billion Mexican dollars due within 12 months. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by Mexican $ 24.3 billion.
While that might sound like a lot, it’s not that bad since Kimberly-Clark of México SAB de C. V has a market cap of Mexican $ 94.3 billion, and so she could likely strengthen her balance sheet by raising capital. if necessary. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.
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). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt compared to EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
While Kimberly-Clark de México SAB de C. V’s low debt / EBITDA ratio of 1.3 suggests a modest use of debt, the fact that EBIT only covered interest expense 5.1 times l last year makes us think. We therefore recommend that you keep a close eye on the impact of financing costs on the business. Unfortunately, Kimberly-Clark de México SAB de C. V’s EBIT actually fell 9.6% over the past year. If this earnings trend continues, its debt load will rise like the heart of a polar bear watching its only cub. When analyzing debt levels, the balance sheet is the obvious place to start. But ultimately, the company’s future profitability will decide whether Kimberly-Clark de México SAB de CV can strengthen her balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, a business can only pay off its debts with hard cash, not with book profits. We therefore always check how much of this EBIT is converted into free cash flow. Over the past three years Kimberly-Clark de México SAB de C. V has recorded free cash flow totaling 86% of its EBIT, which is higher than we normally expected. This puts him in a very strong position to pay off the debt.
Our point of view
When it comes to the balance sheet, the biggest bright spot for Kimberly-Clark of México SAB de C. V was the fact that he seemed able to convert EBIT to free cash flow with confidence. But the other factors we noted above weren’t so encouraging. For example, its EBIT growth rate makes us a little nervous about its debt. Given this range of data points, we believe Kimberly-Clark de México SAB de C. V is well positioned to manage her debt levels. But beware: we believe debt levels are high enough to warrant continued monitoring. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. To this end, you need to know the 2 warning signs we spotted with Kimberly-Clark de México SAB de C. V.
If you want to invest in companies that can generate profits without the burden of debt, check out this 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. We provide commentary based on historical data and analyst forecasts using only 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 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.