Is Shanghai International Airport (SHSE:600009) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Shanghai International Airport Co., Ltd. (SHSE:600009) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shanghai International Airport

What Is Shanghai International Airport's Debt?

The image below, which you can click on for greater detail, shows that Shanghai International Airport had debt of CN¥2.71b at the end of September 2024, a reduction from CN¥3.20b over a year. However, its balance sheet shows it holds CN¥15.3b in cash, so it actually has CN¥12.6b net cash.

A Look At Shanghai International Airport's Liabilities

We can see from the most recent balance sheet that Shanghai International Airport had liabilities of CN¥9.23b falling due within a year, and liabilities of CN¥17.1b due beyond that. Offsetting these obligations, it had cash of CN¥15.3b as well as receivables valued at CN¥2.87b due within 12 months. So its liabilities total CN¥8.18b more than the combination of its cash and short-term receivables.

Given Shanghai International Airport has a humongous market capitalization of CN¥87.4b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Shanghai International Airport also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Shanghai International Airport turned things around in the last 12 months, delivering and EBIT of CN¥1.8b. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Shanghai International Airport'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Shanghai International Airport has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Shanghai International Airport actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Shanghai International Airport has CN¥12.6b in net cash. The cherry on top was that in converted 211% of that EBIT to free cash flow, bringing in CN¥3.8b. So we don't think Shanghai International Airport's use of debt is risky. 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 1 warning sign for Shanghai International Airport you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.