Adani Ports and Special Economic Zones (NSE:ADANIPORTS) Seems to Use Debt Fairly Well | Whuff News


Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ So it seems that the smart money knows that debt – which is usually involved in bankruptcy – is a very important factor, when you judge how risky a company is. We can see that Adani Port and Special Economic Zone Limited (NSE:ADANIPORTS) does use debt in its business. But the real question is whether this debt makes the company risky.

What Risks Does Debt Bring?

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 can’t meet its legal obligations to repay the debt, shareholders can walk away with nothing. However, the more common (but still painful) scenario is that it needs to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces liquidity in the company with the ability to reinvest at a high rate of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Adani Ports and Special Economic Zones

How Much Debt Does Adani Port and Special Economic Zone Bear?

As you can see below, at the end of March 2022, Adani Ports and Special Economic Zones had ₹457.5b in debt, up from ₹349.4b last year. Click the image for more details. However, it also has ₹91.3b in cash, so its net debt is ₹366.2b.

debt-equity-history-analysis
NSEI:ADANIPORTS Debt to Equity History 25 July 2022

How close is Adani Port and the Special Economic Zone’s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Adani Ports and Special Economic Zones has liabilities of ₹111.4b due within 12 months and liabilities of ₹451.0b due beyond that. On the other hand, it has ₹91.3b in cash and ₹44.5b in receivables during the year. So its liabilities amount to ₹426.5b more than its combined cash and short-term receivables.

Adani Ports and Special Economic Zones has a very large market capitalization of ₹1.59t, so it can most likely raise cash to repair its balance sheet, if the need arises. However, it is still worth taking a close look at his ability to repay the debt.

We measure a company’s debt burden relative to its earning power by looking at its net debt divided by earnings before interest, taxes, depreciation and amortization (EBITDA) and by calculating how easily earnings before interest and taxes (EBIT) cover its interest expenses (interest hedging). Therefore, we consider debt relative to income with and without depreciation and amortization expense.

Adani Ports and Special Economic Zones’ net debt is 3.8 times its EBITDA, which is a significant but still reasonable amount of leverage. But its EBIT is about 11.2 times its interest expense, implying the company isn’t really paying high costs to maintain that level of debt. Although the low cost to prove unsustainable, it is a good sign. Also relevant is that Adani Ports and Special Economic Zones increased its EBIT by a very respectable 21% last year, thus improving its ability to service debt. There is no doubt that we learn the most about debt from the balance sheet. But future earnings, more than anything else, will determine the ability of Adani Ports and Special Economic Zones to maintain a healthy balance sheet going forward. So if you are focused on the future you can check this out free reports that show analysts’ profit forecasts.

Ultimately, companies can only pay off debt with cold hard cash, not accounting profits. So the logical step is to look at the portion of that EBIT that matches the actual free cash flow. Over the last three years, Adani Ports and Special Economic Zones generated free cash flow amounting to a very robust 81% of its EBIT, more than we expected. That puts him in a very strong position to pay off the debt.

Our View

Adani Ports and Special Economic Zones’ EBIT conversion to free cash flow shows it can handle its debt as easily as Cristiano Ronaldo can score against under-14 goalkeepers. But, on a more bleak note, we’re a little worried about its net debt to EBITDA. We will also note that Infrastructure industry companies such as Adani Ports and Special Economic Zones typically use debt without problems. Looking at the bigger picture, we think that the use of debt by Adani Ports and the Special Economic Zone seems quite reasonable and we are not concerned about it. After all, proper leverage can increase return on equity. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, every company can contain risks that exist off the balance sheet. This risk is difficult to detect. Every company has them, and we’ve seen them 3 warning signs for Adani Port and Special Economic Zone you should know about.

If, after all that, you’re more interested in fast-growing companies with strong balance sheets, then check out our list of net cash growth stocks without delay.

Valuation is complicated, but we help make it simple.

Find out if Adani Port and Special Economic Zone potential over or under value by reviewing our comprehensive analysis, which includes fair value estimation, risk and warning, dividends, insider trading and financial health.

See Free Analysis

This article by Simply Wall St is general in nature. We provide reviews based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any shares, and does not take into account 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 take into account recent price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.



Source link