Here's Why Hainan Airport Infrastructure (SHSE:600515) Has A Meaningful Debt Burden

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Hainan Airport Infrastructure Co., Ltd (SHSE:600515) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Hainan Airport Infrastructure

What Is Hainan Airport Infrastructure's Net Debt?

The chart below, which you can click on for greater detail, shows that Hainan Airport Infrastructure had CN¥19.1b in debt in September 2023; about the same as the year before. However, because it has a cash reserve of CN¥8.38b, its net debt is less, at about CN¥10.7b.

How Healthy Is Hainan Airport Infrastructure's Balance Sheet?

According to the last reported balance sheet, Hainan Airport Infrastructure had liabilities of CN¥10.1b due within 12 months, and liabilities of CN¥20.9b due beyond 12 months. Offsetting these obligations, it had cash of CN¥8.38b as well as receivables valued at CN¥2.16b due within 12 months. So it has liabilities totalling CN¥20.5b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Hainan Airport Infrastructure is worth CN¥42.6b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt.

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.

Hainan Airport Infrastructure has a rather high debt to EBITDA ratio of 7.0 which suggests a meaningful debt load. However, its interest coverage of 4.2 is reasonably strong, which is a good sign. Looking on the bright side, Hainan Airport Infrastructure boosted its EBIT by a silky 71% in the last year. Like the milk of human kindness that sort of growth increases resilience, making the company more capable of managing debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Hainan Airport Infrastructure's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last two years, Hainan Airport Infrastructure burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far 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. 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. Case in point: We've spotted 3 warning signs for Hainan Airport Infrastructure you should be aware of, and 1 of them is a bit concerning.

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.