Health Check: How Prudently Does Fraport (ETR:FRA) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Fraport AG (ETR:FRA) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Fraport

How Much Debt Does Fraport Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Fraport had €6.81b of debt, an increase on €5.20b, over one year. On the flip side, it has €1.68b in cash leading to net debt of about €5.13b.

How Strong Is Fraport's Balance Sheet?

The latest balance sheet data shows that Fraport had liabilities of €1.38b due within a year, and liabilities of €8.49b falling due after that. Offsetting these obligations, it had cash of €1.68b as well as receivables valued at €438.6m due within 12 months. So its liabilities total €7.75b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the €4.43b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Fraport would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Fraport can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Fraport had a loss before interest and tax, and actually shrunk its revenue by 42%, to €2.2b. To be frank that doesn't bode well.

Caveat Emptor

While Fraport's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping €480m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of €1.2b over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Fraport (1 shouldn't be ignored!) that you should be aware of before investing here.

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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