Is Aena S.M.E (BME:AENA) 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. We can see that Aena S.M.E., S.A. (BME:AENA) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Aena S.M.E

What Is Aena S.M.E's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2021 Aena S.M.E had debt of €8.14b, up from €7.64b in one year. However, it does have €696.9m in cash offsetting this, leading to net debt of about €7.45b.

A Look At Aena S.M.E's Liabilities

We can see from the most recent balance sheet that Aena S.M.E had liabilities of €1.94b falling due within a year, and liabilities of €7.56b due beyond that. On the other hand, it had cash of €696.9m and €1.05b worth of receivables due within a year. So its liabilities total €7.75b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Aena S.M.E has a huge market capitalization of €21.1b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aena S.M.E's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Aena S.M.E had a loss before interest and tax, and actually shrunk its revenue by 59%, to €1.8b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Aena S.M.E's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €392m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €915m 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. For instance, we've identified 1 warning sign for Aena S.M.E that 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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