Does Hainan Airport Infrastructure (SHSE:600515) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Hainan Airport Infrastructure Co., Ltd (SHSE:600515) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Hainan Airport Infrastructure

How Much Debt Does Hainan Airport Infrastructure Carry?

The chart below, which you can click on for greater detail, shows that Hainan Airport Infrastructure had CN¥18.9b in debt in March 2024; about the same as the year before. However, because it has a cash reserve of CN¥6.20b, its net debt is less, at about CN¥12.7b.

How Strong Is Hainan Airport Infrastructure's Balance Sheet?

We can see from the most recent balance sheet that Hainan Airport Infrastructure had liabilities of CN¥8.95b falling due within a year, and liabilities of CN¥21.5b due beyond that. On the other hand, it had cash of CN¥6.20b and CN¥2.21b worth of receivables due within a year. So it has liabilities totalling CN¥22.0b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥36.2b, so it does suggest shareholders should keep an eye on Hainan Airport Infrastructure's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

With a net debt to EBITDA ratio of 5.9, it's fair to say Hainan Airport Infrastructure does have a significant amount of debt. However, its interest coverage of 6.5 is reasonably strong, which is a good sign. Pleasingly, Hainan Airport Infrastructure is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 566% gain in the last twelve months. 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 Hainan Airport Infrastructure 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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, Hainan Airport Infrastructure saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Hainan Airport Infrastructure's conversion of EBIT to free cash flow and net debt to EBITDA definitely weigh on it, in our esteem. But the good news is it seems to be able to grow its EBIT with ease. When we consider all the factors discussed, it seems to us that Hainan Airport Infrastructure is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Hainan Airport Infrastructure (of which 1 shouldn't be ignored!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

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