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.' 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 Aeroports de Paris SA (EPA:ADP) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
How Much Debt Does Aeroports de Paris Carry?
As you can see below, at the end of December 2020, Aeroports de Paris had €10.9b of debt, up from €7.39b a year ago. Click the image for more detail. On the flip side, it has €3.56b in cash leading to net debt of about €7.33b.
A Look At Aeroports de Paris' Liabilities
Zooming in on the latest balance sheet data, we can see that Aeroports de Paris had liabilities of €3.36b due within 12 months and liabilities of €11.0b due beyond that. Offsetting these obligations, it had cash of €3.56b as well as receivables valued at €1.10b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €9.69b.
This deficit is considerable relative to its very significant market capitalization of €10.3b, so it does suggest shareholders should keep an eye on Aeroports de Paris' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Aeroports de Paris'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.
Over 12 months, Aeroports de Paris made a loss at the EBIT level, and saw its revenue drop to €2.1b, which is a fall of 54%. That makes us nervous, to say the least.
While Aeroports de Paris's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at €545m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 €552m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. For example - Aeroports de Paris has 1 warning sign we think you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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