Here’s why Airport City (TLV: ARPT) can responsibly manage its debt

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Some say volatility, rather than debt, is the best way to view risk as an investor, but Warren Buffett said “volatility is far from risk.” It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Mostly, Airport City Ltd. (TLV: ARPT) carries the debt. But the most important question is: what risk does this debt create?

When is debt a problem?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. If things really go wrong, lenders can take over the business. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. Of course, many companies use debt to finance their growth without negative consequences. When we look at debt levels, we first look at cash and debt levels together.

Check out our latest review for Airport City

How much debt does Airport City have?

As you can see below, Airport City had 5.26 billion yen in debt, as of March 2021, which is roughly the same as the year before. You can click on the graph for more details. On the other hand, it has 955.0 million euros in cash, resulting in net debt of around 4.31 billion euros.

TASE: ARPT History of debt to equity June 25, 2021

How strong is Airport City’s balance sheet?

According to the latest published balance sheet, Airport City had liabilities of 1.68 billion yen due within 12 months and liabilities of 5.46 billion yen due beyond 12 months. On the other hand, it had cash of 955.0 M and 260.6 M of receivables due within one year. Thus, its liabilities exceed the sum of its cash and its (short-term) receivables by 5.92 ₪.

This shortfall is substantial compared to its market cap of 7.11b, so he suggests shareholders keep an eye on the use of Airport City debt. This suggests that shareholders would be heavily diluted if the company needed to consolidate its balance sheet quickly.

We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).

As it turns out, Airport City has a rather worrying net debt to EBITDA ratio of 7.2 but very strong interest coverage of 10.6. This means that unless the business has access to very cheap debt, these interest charges will likely increase in the future. We have seen Airport City increase its EBIT by 5.7% over the past twelve months. While this hardly strikes us, it is a bright spot when it comes to debt. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in isolation; since Airport City will need revenue to pay off this debt. So, when considering debt, it is really worth looking at the profit trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debts; accounting profits are not enough. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, Airport City has recorded free cash flow of 75% of its EBIT, which is close to normal given that free cash flow excludes interest and taxes. This free cash flow puts the business in a good position to repay debt, if any.

Our point of view

Airport City’s net debt to EBITDA was really negative in this analysis, although the other factors we considered were considerably better. In particular, we are dazzled by its conversion of EBIT into free cash flow. Looking at all of this data, we feel a little cautious about Airport City’s debt levels. While we understand that debt can improve returns on equity, we suggest shareholders watch their debt level closely, lest they increase. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. Note that Airport City displays 2 warning signs in our investment analysis , and 1 of them is a bit disturbing …

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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