Københavns Lufthavne (CPH:KBHL) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Københavns Lufthavne A/S (CPH:KBHL) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Københavns Lufthavne

What Is Københavns Lufthavne's Debt?

As you can see below, Københavns Lufthavne had kr.10.4b of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it also had kr.231.0m in cash, and so its net debt is kr.10.1b.

A Look At Københavns Lufthavne's Liabilities

The latest balance sheet data shows that Københavns Lufthavne had liabilities of kr.7.13b due within a year, and liabilities of kr.5.14b falling due after that. Offsetting this, it had kr.231.0m in cash and kr.476.0m in receivables that were due within 12 months. So it has liabilities totalling kr.11.6b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Københavns Lufthavne has a market capitalization of kr.49.4b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Københavns Lufthavne shareholders face the double whammy of a high net debt to EBITDA ratio (9.3), and fairly weak interest coverage, since EBIT is just 1.4 times the interest expense. This means we'd consider it to have a heavy debt load. One redeeming factor for Københavns Lufthavne is that it turned last year's EBIT loss into a gain of kr.218m, over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Københavns Lufthavne will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of the earnings before interest and tax (EBIT) is backed by free cash flow. Happily for any shareholders, Københavns Lufthavne actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Our View

Københavns Lufthavne's net debt to EBITDA was a real negative on this analysis, as was its interest cover. But its conversion of EBIT to free cash flow was significantly redeeming. We would also note that Infrastructure industry companies like Københavns Lufthavne commonly do use debt without problems. Looking at all this data makes us feel a little cautious about Københavns Lufthavne's debt levels. While we appreciate debt can enhance returns on equity, we'd suggest that shareholders keep close watch on its debt levels, lest they increase. 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 3 warning signs for Københavns Lufthavne (2 are significant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.