We Think Airbus (EPA:AIR) Can Stay On Top Of Its 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. Importantly, Airbus SE (EPA:AIR) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Our analysis indicates that AIR is potentially undervalued!

What Is Airbus's Debt?

The image below, which you can click on for greater detail, shows that Airbus had debt of €11.2b at the end of September 2022, a reduction from €13.3b over a year. However, its balance sheet shows it holds €16.6b in cash, so it actually has €5.43b net cash.

A Look At Airbus' Liabilities

According to the last reported balance sheet, Airbus had liabilities of €60.4b due within 12 months, and liabilities of €54.6b due beyond 12 months. Offsetting this, it had €16.6b in cash and €10.0b in receivables that were due within 12 months. So its liabilities total €88.3b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its very significant market capitalization of €90.0b, so it does suggest shareholders should keep an eye on Airbus' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Airbus boasts net cash, so it's fair to say it does not have a heavy debt load!

Airbus's EBIT was pretty flat over the last year, but that shouldn't be an issue given the it doesn't have a lot of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Airbus can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Airbus may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Airbus actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Airbus does have more liabilities than liquid assets, it also has net cash of €5.43b. And it impressed us with free cash flow of €2.6b, being 101% of its EBIT. So we are not troubled with Airbus's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Airbus you should know about.

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.