Is Flughafen Zürich (VTX:FHZN) Using Too Much Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Flughafen Zürich AG (VTX:FHZN) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Flughafen Zürich

What Is Flughafen Zürich's Debt?

The image below, which you can click on for greater detail, shows that Flughafen Zürich had debt of CHF1.37b at the end of June 2023, a reduction from CHF1.91b over a year. However, it does have CHF430.7m in cash offsetting this, leading to net debt of about CHF944.0m.

How Strong Is Flughafen Zürich's Balance Sheet?

The latest balance sheet data shows that Flughafen Zürich had liabilities of CHF634.0m due within a year, and liabilities of CHF1.59b falling due after that. Offsetting these obligations, it had cash of CHF430.7m as well as receivables valued at CHF328.5m due within 12 months. So it has liabilities totalling CHF1.47b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Flughafen Zürich is worth CHF5.48b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Flughafen Zürich has a low net debt to EBITDA ratio of only 1.5. And its EBIT easily covers its interest expense, being 34.9 times the size. So we're pretty relaxed about its super-conservative use of debt. Even more impressive was the fact that Flughafen Zürich grew its EBIT by 122% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Flughafen Zürich'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. Happily for any shareholders, Flughafen Zürich actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

The good news is that Flughafen Zürich's demonstrated ability to cover its interest expense with its EBIT delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its conversion of EBIT to free cash flow also supports that impression! We would also note that Infrastructure industry companies like Flughafen Zürich commonly do use debt without problems. Considering this range of factors, it seems to us that Flughafen Zürich is quite prudent with its debt, and the risks seem well managed. So we're not worried about the use of a little leverage on the balance sheet. Over time, share prices tend to follow earnings per share, so if you're interested in Flughafen Zürich, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.