Here's Why Piraeus Port Authority (ATH:PPA) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Piraeus Port Authority S.A. (ATH:PPA) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Piraeus Port Authority

How Much Debt Does Piraeus Port Authority Carry?

You can click the graphic below for the historical numbers, but it shows that Piraeus Port Authority had €50.5m of debt in December 2020, down from €56.5m, one year before. However, its balance sheet shows it holds €111.4m in cash, so it actually has €60.9m net cash.

How Healthy Is Piraeus Port Authority's Balance Sheet?

We can see from the most recent balance sheet that Piraeus Port Authority had liabilities of €31.4m falling due within a year, and liabilities of €202.9m due beyond that. Offsetting these obligations, it had cash of €111.4m as well as receivables valued at €12.0m due within 12 months. So its liabilities total €110.9m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Piraeus Port Authority has a market capitalization of €540.0m, 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. Despite its noteworthy liabilities, Piraeus Port Authority boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Piraeus Port Authority's EBIT dived 15%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Piraeus Port Authority will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Piraeus Port Authority 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 most recent three years, Piraeus Port Authority recorded free cash flow worth 68% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

Although Piraeus Port Authority's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €60.9m. The cherry on top was that in converted 68% of that EBIT to free cash flow, bringing in €22m. So we are not troubled with Piraeus Port Authority's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in Piraeus Port Authority, you may well want to click here to check an interactive graph of its earnings per share history.

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.

When trading Piraeus Port Authority or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.