Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Malaysia Airports Holdings Berhad (KLSE:AIRPORT) is in debt. But should shareholders worry about its use of debt?
When is debt a problem?
Debt and other liabilities become risky for a business when it cannot easily meet those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.
Check out our latest analysis for Malaysia Airports Holdings Berhad
What is the net debt of Malaysia Airports Holdings Berhad?
As you can see below, at the end of March 2022, Malaysia Airports Holdings Berhad had a debt of RM5.32 billion, compared to RM4.68 billion a year ago. Click on the image for more details. On the other hand, he has RM2.26 billion in cash, resulting in a net debt of around RM3.06 billion.
How healthy is Malaysia Airports Holdings Berhad’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Malaysia Airports Holdings Berhad had liabilities of RM3.59b due within 12 months and liabilities of RM9.31b due beyond. On the other hand, it had cash of RM2.26 billion and RM458.3 million of receivables due within one year. It therefore has liabilities totaling RM10.2 billion more than its cash and short-term receivables, combined.
That’s a mountain of leverage compared to its market capitalization of RM10.4b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly.
We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Although we are not concerned about Malaysia Airports Holdings Berhad’s net debt to EBITDA ratio of 2.7, we believe that its extremely low interest coverage of 0.87 times is a sign of high leverage. . This is largely due to the company’s large amortization charges, which no doubt means that its EBITDA is a very generous measure of earnings, and that its debt may be heavier than it first appears. on board. It seems clear that the cost of borrowing money is having a negative impact on shareholder returns lately. The silver lining is that Malaysia Airports Holdings Berhad increased its EBIT by 142% last year, which feeds like youthful idealism. If this earnings trend continues, it will make its leverage much more manageable in the future. There is no doubt that we learn the most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Malaysia Airports Holdings Berhad’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a business needs free cash flow to pay off its debts; book profits are not enough. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Malaysia Airports Holdings Berhad has recorded free cash flow of 86% of its EBIT, which is higher than what we would normally expect. This puts him in a very strong position to pay off the debt.
Our point of view
Malaysia Airports Holdings Berhad’s interest coverage was a real negative in this analysis, although the other factors we considered were considerably better. In particular, we are blown away by its conversion of EBIT to free cash flow. It should also be noted that Malaysia Airports Holdings Berhad is in the infrastructure business, which is often seen as quite defensive. When considering all of the elements mentioned above, it seems to us that Malaysia Airports Holdings Berhad manages its debt quite well. That said, the charge is heavy enough that we recommend that any shareholder keep a close eye on it. While Malaysia Airports Holdings Berhad failed to make a statutory profit last year, its positive EBIT suggests profitability may not be far off. Click here to see if its earnings are heading in the right direction, in the medium term.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.