Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about. When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Piraeus Port Authority S.A. (ATH:PPA) does have debt on its balance sheet. 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 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.
What Is Piraeus Port Authority's Net Debt?
As you can see below, Piraeus Port Authority had €59.5m of debt at June 2019, down from €65.5m a year prior. However, its balance sheet shows it holds €88.5m in cash, so it actually has €29.0m net cash.
How Healthy Is Piraeus Port Authority's Balance Sheet?
The latest balance sheet data shows that Piraeus Port Authority had liabilities of €53.0m due within a year, and liabilities of €199.9m falling due after that. On the other hand, it had cash of €88.5m and €21.9m worth of receivables due within a year. So it has liabilities totalling €142.5m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Piraeus Port Authority has a market capitalization of €576.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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, Piraeus Port Authority also has more cash than debt, so we're pretty confident it can manage its debt safely.
Also positive, Piraeus Port Authority grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Piraeus Port Authority 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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. During the last three years, Piraeus Port Authority produced sturdy free cash flow equating to 60% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.
While Piraeus Port Authority does have more liabilities than liquid assets, it also has net cash of €29.0m. And we liked the look of last year's 27% year-on-year EBIT growth. So is Piraeus Port Authority's debt a risk? It doesn't seem so to us. 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.
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