Does Orbia Advance Corporation. by (BMV:ORBIA) Have a healthy balance sheet?

Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Orbia Advance Corporation, SAB de CV (BMV:ORBIA) uses debt in its business. But does this debt worry shareholders?

When is debt dangerous?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a great 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 has is to look at its cash and debt together.

See our latest review for Orbia Advance Corporation. of

What is Orbia Advance Corporation. net debt?

The table below, which you can click on for more details, shows that Orbia Advance Corporation. had $4.49 billion in debt as of June 2022; about the same as the previous year. On the other hand, it has $898.4 million in cash, resulting in a net debt of around $3.59 billion.

BMV:ORBIA * Historical Debt to Equity September 19, 2022

A look at Orbia Advance Corporation. Responsibilities of

Zooming in on the latest balance sheet data, we can see that Orbia Advance Corporation. de had liabilities of US$3.20 billion due within 12 months and liabilities of US$4.85 billion due beyond. On the other hand, it had liquidities of 898.4 million dollars and 1.93 billion dollars of receivables at less than one year. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $5.22 billion.

When you consider that shortfall exceeds the company’s US$3.62 billion market capitalization, you might well be inclined to take a close look at the balance sheet. In the scenario where the company were to quickly clean up its balance sheet, it seems likely that shareholders would suffer significant dilution.

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). 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 ).

Orbia Advance Corporation. net debt of 1.6x EBITDA suggests judicious use of debt. And the attractive interest cover (EBIT of 7.9 times interest expense) certainly makes not do everything to dispel this impression. On top of that, we are happy to announce that Orbia Advance Corporation. de increased its EBIT by 44%, reducing the specter of future debt repayments. The balance sheet is clearly the area to focus on when analyzing debt. But future revenues, more than anything, will determine Orbia Advance Corporation. 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 company can only repay its debts with cold 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, Orbia Advance Corporation. de recorded free cash flow of 70% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This free cash flow puts the company in a good position to repay its debt, should it arise.

Our point of view

On our Orbia Advance Corporation analysis. De’s EBIT growth rate should signal that it won’t have too many problems with its debt. But the other factors we noted above weren’t so encouraging. In particular, the level of total liabilities gives us chills. Looking at all this data, we feel a bit cautious about Orbia Advance Corporation. debt levels. While we understand that debt can improve return on equity, we suggest shareholders keep a close eye on their level of debt, lest it increase. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 3 warning signs for Orbia Advance Corporation. of you should be aware of, and 1 of them is significant.

Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.

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.

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