Here's Why Flughafen Wien (VIE:FLU) Has A Meaningful Debt Burden

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Flughafen Wien Aktiengesellschaft (VIE:FLU) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Flughafen Wien

What Is Flughafen Wien's Debt?

The image below, which you can click on for greater detail, shows that Flughafen Wien had debt of €375.1m at the end of September 2020, a reduction from €391.9m over a year. However, it does have €91.4m in cash offsetting this, leading to net debt of about €283.7m.

How Healthy Is Flughafen Wien's Balance Sheet?

The latest balance sheet data shows that Flughafen Wien had liabilities of €336.7m due within a year, and liabilities of €532.5m falling due after that. On the other hand, it had cash of €91.4m and €132.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €645.5m.

While this might seem like a lot, it is not so bad since Flughafen Wien has a market capitalization of €2.43b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Even though Flughafen Wien's debt is only 2.1, its interest cover is really very low at 0.25. The main reason for this is that it has such high depreciation and amortisation. While companies often boast that these charges are non-cash, most such businesses will therefore require ongoing investment (that is not expensed.) In any case, it's safe to say the company has meaningful debt. Importantly, Flughafen Wien's EBIT fell a jaw-dropping 99% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Flughafen Wien's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the most recent three years, Flughafen Wien recorded free cash flow worth 63% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Our View

Both Flughafen Wien's EBIT growth rate and its interest cover were discouraging. At least its conversion of EBIT to free cash flow gives us reason to be optimistic. We should also note that Infrastructure industry companies like Flughafen Wien commonly do use debt without problems. When we consider all the factors discussed, it seems to us that Flughafen Wien is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Flughafen Wien that you should be aware of.

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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