Is Malaysia Airports Holdings Berhad (KLSE:AIRPORT) A Risky Investment?

David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Malaysia Airports Holdings Berhad (KLSE:AIRPORT) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Malaysia Airports Holdings Berhad

What Is Malaysia Airports Holdings Berhad’s Net Debt?

As you can see below, Malaysia Airports Holdings Berhad had RM4.85b of debt at June 2023, down from RM6.00b a year prior. However, because it has a cash reserve of RM1.68b, its net debt is less, at about RM3.17b.

A Look At Malaysia Airports Holdings Berhad’s Liabilities

Zooming in on the latest balance sheet data, we can see that Malaysia Airports Holdings Berhad had liabilities of RM2.95b due within 12 months and liabilities of RM8.95b due beyond that. Offsetting this, it had RM1.68b in cash and RM723.4m in receivables that were due within 12 months. So its liabilities total RM9.51b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of RM12.3b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

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). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

Malaysia Airports Holdings Berhad has a low net debt to EBITDA ratio of only 1.1. And its EBIT covers its interest expense a whopping 40.4 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Even more impressive was the fact that Malaysia Airports Holdings Berhad grew its EBIT by 155% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Malaysia Airports Holdings Berhad 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So it’s worth checking how much of that EBIT is backed by free cash flow. Looking at the most recent three years, Malaysia Airports Holdings Berhad recorded free cash flow of 45% of its EBIT, which is weaker than we’d expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Malaysia Airports Holdings Berhad’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. It’s also worth noting that Malaysia Airports Holdings Berhad is in the Infrastructure industry, which is often considered to be quite defensive. Looking at all the aforementioned factors together, it strikes us that Malaysia Airports Holdings Berhad can handle its debt fairly comfortably. Of course, while this leverage can enhance returns on equity, it does bring more risk, so it’s worth keeping an eye on this one. There’s no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet – far from it. For example – Malaysia Airports Holdings Berhad has 1 warning sign we think you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.