Is Piraeus Port Authority (ATH:PPA) A Risky Investment?

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.' 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 Piraeus Port Authority S.A. (ATH:PPA) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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.

Check out our latest analysis for Piraeus Port Authority

What Is Piraeus Port Authority's Debt?

As you can see below, Piraeus Port Authority had €53.5m of debt at June 2020, down from €59.5m a year prior. But it also has €113.1m in cash to offset that, meaning it has €59.6m net cash.

A Look At Piraeus Port Authority's Liabilities

The latest balance sheet data shows that Piraeus Port Authority had liabilities of €32.1m due within a year, and liabilities of €197.9m falling due after that. On the other hand, it had cash of €113.1m and €14.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €102.3m.

While this might seem like a lot, it is not so bad since Piraeus Port Authority has a market capitalization of €486.5m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Piraeus Port Authority also has more cash than debt, so we're pretty confident it can manage its debt safely.

Fortunately, Piraeus Port Authority grew its EBIT by 7.6% in the last year, making that debt load look even more manageable. 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 78% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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 €59.6m. And it impressed us with free cash flow of €40m, being 78% of its EBIT. So is Piraeus Port Authority's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with Piraeus Port Authority .

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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