Here's Why ENAV (BIT:ENAV) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies ENAV S.p.A. (BIT:ENAV) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. 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 ENAV

How Much Debt Does ENAV Carry?

The chart below, which you can click on for greater detail, shows that ENAV had €333.8m in debt in June 2020; about the same as the year before. On the flip side, it has €243.3m in cash leading to net debt of about €90.5m.

How Strong Is ENAV's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that ENAV had liabilities of €353.0m due within 12 months and liabilities of €581.0m due beyond that. On the other hand, it had cash of €243.3m and €218.6m worth of receivables due within a year. So it has liabilities totalling €472.2m more than its cash and near-term receivables, combined.

ENAV has a market capitalization of €2.07b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

ENAV's net debt is only 0.34 times its EBITDA. And its EBIT easily covers its interest expense, being 29.6 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, ENAV's EBIT dived 12%, 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 ultimately the future profitability of the business will decide if ENAV can strengthen its balance sheet over time. 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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, ENAV actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Our View

Happily, ENAV's impressive interest cover implies it has the upper hand on its debt. But the stark truth is that we are concerned by its EBIT growth rate. We would also note that Infrastructure industry companies like ENAV commonly do use debt without problems. When we consider the range of factors above, it looks like ENAV is pretty sensible with its use of debt. While that brings some risk, it can also enhance returns for shareholders. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that ENAV is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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