Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Airbus SE (EPA:AIR) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
What Is Airbus's Net Debt?
As you can see below, Airbus had €13.3b of debt at September 2021, down from €16.7b a year prior. But it also has €16.7b in cash to offset that, meaning it has €3.38b net cash.
How Healthy Is Airbus' Balance Sheet?
According to the last reported balance sheet, Airbus had liabilities of €50.5b due within 12 months, and liabilities of €48.9b due beyond 12 months. Offsetting these obligations, it had cash of €16.7b as well as receivables valued at €8.56b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €74.2b.
This is a mountain of leverage even relative to its gargantuan market capitalization of €93.4b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Airbus also has more cash than debt, so we're pretty confident it can manage its debt safely.
Although Airbus made a loss at the EBIT level, last year, it was also good to see that it generated €5.7b in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Airbus'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Airbus has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Airbus actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
While Airbus does have more liabilities than liquid assets, it also has net cash of €3.38b. And it impressed us with free cash flow of €7.0b, being 123% of its EBIT. So we don't have any problem with Airbus's use of debt. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Airbus's earnings per share history for free.
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.
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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.