These 4 Measures Indicate That Corporación América Airports (NYSE:CAAP) Is Using Debt Reasonably Well

Simply Wall St · 11/26 10:29

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Corporación América Airports S.A. (NYSE:CAAP) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Corporación América Airports

What Is Corporación América Airports's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Corporación América Airports had US$1.22b of debt in June 2024, down from US$1.42b, one year before. However, it does have US$548.5m in cash offsetting this, leading to net debt of about US$673.8m.

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NYSE:CAAP Debt to Equity History November 26th 2024

How Strong Is Corporación América Airports' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Corporación América Airports had liabilities of US$575.7m due within 12 months and liabilities of US$2.12b due beyond that. Offsetting these obligations, it had cash of US$548.5m as well as receivables valued at US$200.0m due within 12 months. So its liabilities total US$1.95b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of US$3.02b, so it does suggest shareholders should keep an eye on Corporación América Airports' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Corporación América Airports's net debt is only 1.1 times its EBITDA. And its EBIT covers its interest expense a whopping 12.4 times over. So we're pretty relaxed about its super-conservative use of debt. Also good is that Corporación América Airports grew its EBIT at 17% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Corporación América Airports's ability to maintain a healthy balance sheet going forward. 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. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. Over the last three years, Corporación América Airports actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Our View

Corporación América Airports's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But, on a more sombre note, we are a little concerned by its level of total liabilities. We would also note that Infrastructure industry companies like Corporación América Airports commonly do use debt without problems. Taking all this data into account, it seems to us that Corporación América Airports takes a pretty sensible approach to debt. That means they are taking on a bit more risk, in the hope of boosting shareholder returns. 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. For example - Corporación América Airports has 2 warning signs we think you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.