Shanghai International Airport (SHSE:600009) Could Easily Take On More Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Shanghai International Airport Co., Ltd. (SHSE:600009) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. 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 Shanghai International Airport

What Is Shanghai International Airport's Net Debt?

The image below, which you can click on for greater detail, shows that Shanghai International Airport had debt of CN¥5.20b at the end of March 2024, a reduction from CN¥5.47b over a year. But on the other hand it also has CN¥15.9b in cash, leading to a CN¥10.7b net cash position.

A Look At Shanghai International Airport's Liabilities

Zooming in on the latest balance sheet data, we can see that Shanghai International Airport had liabilities of CN¥10.5b due within 12 months and liabilities of CN¥17.6b due beyond that. Offsetting this, it had CN¥15.9b in cash and CN¥3.18b in receivables that were due within 12 months. So it has liabilities totalling CN¥9.01b more than its cash and near-term receivables, combined.

Since publicly traded Shanghai International Airport shares are worth a very impressive total of CN¥86.2b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Shanghai International Airport boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Shanghai International Airport made a loss at the EBIT level, last year, it was also good to see that it generated CN¥1.7b in EBIT over the last twelve months. 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 Shanghai International Airport 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. 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 conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Shanghai International Airport does have more liabilities than liquid assets, it also has net cash of CN¥10.7b. And it impressed us with free cash flow of CN¥2.5b, being 148% of its EBIT. So is Shanghai International Airport's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shanghai International Airport's earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com