Is Københavns Lufthavne (CPH:KBHL) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Københavns Lufthavne A/S (CPH:KBHL) makes use of debt. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Københavns Lufthavne

What Is Københavns Lufthavne's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Københavns Lufthavne had kr.10.6b of debt, an increase on kr.10.1b, over one year. Net debt is about the same, since the it doesn't have much cash.

A Look At Københavns Lufthavne's Liabilities

The latest balance sheet data shows that Københavns Lufthavne had liabilities of kr.1.13b due within a year, and liabilities of kr.11.2b falling due after that. Offsetting this, it had kr.103.0m in cash and kr.499.0m in receivables that were due within 12 months. So its liabilities total kr.11.7b more than the combination of its cash and short-term receivables.

Since publicly traded Københavns Lufthavne shares are worth a total of kr.59.3b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Københavns Lufthavne will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Københavns Lufthavne wasn't profitable at an EBIT level, but managed to grow its revenue by 115%, to kr.2.1b. So its pretty obvious shareholders are hoping for more growth!

Caveat Emptor

Even though Københavns Lufthavne managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost kr.502m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled kr.340m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Københavns Lufthavne .

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.