Here's Why Macquarie Infrastructure (NYSE:MIC) Has A Meaningful Debt Burden

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Macquarie Infrastructure Corporation (NYSE:MIC) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Macquarie Infrastructure

What Is Macquarie Infrastructure's Debt?

As you can see below, Macquarie Infrastructure had US$1.57b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has US$1.83b in cash to offset that, meaning it has US$262.0m net cash.

How Strong Is Macquarie Infrastructure's Balance Sheet?

We can see from the most recent balance sheet that Macquarie Infrastructure had liabilities of US$1.22b falling due within a year, and liabilities of US$2.06b due beyond that. Offsetting these obligations, it had cash of US$1.83b as well as receivables valued at US$47.0m due within 12 months. So its liabilities total US$1.41b more than the combination of its cash and short-term receivables.

Macquarie Infrastructure has a market capitalization of US$2.79b, 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. While it does have liabilities worth noting, Macquarie Infrastructure also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Macquarie Infrastructure's EBIT fell a jaw-dropping 94% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. 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 Macquarie Infrastructure 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Macquarie Infrastructure 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. Happily for any shareholders, Macquarie Infrastructure actually produced more free cash flow than EBIT over the last three years. 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 Macquarie Infrastructure does have more liabilities than liquid assets, it also has net cash of US$262.0m. The cherry on top was that in converted 415% of that EBIT to free cash flow, bringing in US$287m. So although we see some areas for improvement, we're not too worried about Macquarie Infrastructure's balance sheet. 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. We've identified 2 warning signs with Macquarie Infrastructure (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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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