Is Aeroporto Guglielmo Marconi di Bologna (BIT:ADB) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Aeroporto Guglielmo Marconi di Bologna S.p.A. (BIT:ADB) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses 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 and debt together.

Check out our latest analysis for Aeroporto Guglielmo Marconi di Bologna

What Is Aeroporto Guglielmo Marconi di Bologna's Net Debt?

The image below, which you can click on for greater detail, shows that Aeroporto Guglielmo Marconi di Bologna had debt of €15.8m at the end of March 2020, a reduction from €20.9m over a year. But it also has €27.3m in cash to offset that, meaning it has €11.6m net cash.

A Look At Aeroporto Guglielmo Marconi di Bologna's Liabilities

The latest balance sheet data shows that Aeroporto Guglielmo Marconi di Bologna had liabilities of €55.7m due within a year, and liabilities of €30.8m falling due after that. Offsetting these obligations, it had cash of €27.3m as well as receivables valued at €16.9m due within 12 months. So it has liabilities totalling €42.4m more than its cash and near-term receivables, combined.

Since publicly traded Aeroporto Guglielmo Marconi di Bologna shares are worth a total of €304.9m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Aeroporto Guglielmo Marconi di Bologna boasts net cash, so it's fair to say it does not have a heavy debt load!

While Aeroporto Guglielmo Marconi di Bologna doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Aeroporto Guglielmo Marconi di Bologna 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Aeroporto Guglielmo Marconi di Bologna has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Aeroporto Guglielmo Marconi di Bologna produced sturdy free cash flow equating to 53% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing up

Although Aeroporto Guglielmo Marconi di Bologna's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €11.6m. So we don't have any problem with Aeroporto Guglielmo Marconi di Bologna's use of debt. Over time, share prices tend to follow earnings per share, so if you're interested in Aeroporto Guglielmo Marconi di Bologna, you may well want to click here to check an interactive graph of its earnings per share history.

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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