Would Aena S.M.E (BME:AENA) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Aena S.M.E

How Much Debt Does Aena S.M.E Carry?

The image below, which you can click on for greater detail, shows that Aena S.M.E had debt of €8.12b at the end of June 2021, a reduction from €8.94b over a year. However, it also had €418.6m in cash, and so its net debt is €7.70b.

How Healthy Is Aena S.M.E's Balance Sheet?

According to the last reported balance sheet, Aena S.M.E had liabilities of €1.79b due within 12 months, and liabilities of €7.59b due beyond 12 months. On the other hand, it had cash of €418.6m and €1.17b worth of receivables due within a year. So it has liabilities totalling €7.79b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Aena S.M.E has a huge market capitalization of €21.3b, 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Aena S.M.E made a loss at the EBIT level, and saw its revenue drop to €1.9b, which is a fall of 44%. That makes us nervous, to say the least.

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 €310m. 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. However, it doesn't help that it burned through €923m of cash over the last year. So suffice it to say we do consider the stock to be 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.

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