Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that BBB Foods Inc. (NYSE:TBBB) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is BBB Foods's Net Debt?

As you can see below, BBB Foods had Mex$1.05b of debt at March 2024, down from Mex$5.31b a year prior. However, its balance sheet shows it holds Mex$4.29b in cash, so it actually has Mex$3.24b net cash.

How Strong Is BBB Foods' Balance Sheet?

According to the last reported balance sheet, BBB Foods had liabilities of Mex$9.32b due within 12 months, and liabilities of Mex$6.30b due beyond 12 months. On the other hand, it had cash of Mex$4.29b and Mex$832.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by Mex$10.5b.

Since publicly traded BBB Foods shares are worth a total of Mex$57.1b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, BBB Foods also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, BBB Foods grew its EBIT by 76% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if BBB Foods can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. BBB Foods may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, BBB Foods actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While BBB Foods does have more liabilities than liquid assets, it also has net cash of Mex$3.24b. And it impressed us with free cash flow of Mex$1.5b, being 169% of its EBIT. So we don't think BBB Foods's use of debt is risky. While BBB Foods didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an 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 account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.