These 4 Measures Indicate That Shanghai International Airport (SHSE:600009) Is Using Debt Safely

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Shanghai International Airport Co., Ltd. (SHSE:600009) does carry debt. But should shareholders be worried about its use of debt?

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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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

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¥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

According to the last reported balance sheet, Shanghai International Airport had liabilities of CN¥9.23b due within 12 months, and liabilities of CN¥17.1b due beyond 12 months. 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.

Of course, Shanghai International Airport has a titanic market capitalization of CN¥81.3b, so these liabilities are probably manageable. 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!

View our latest analysis for Shanghai International Airport

Although Shanghai International Airport made a loss at the EBIT level, last year, it was also good to see that it generated CN¥1.8b in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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'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. Shanghai International Airport may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Shanghai International Airport actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Shanghai International Airport does have more liabilities than liquid assets, it also has net cash of CN¥12.6b. And it impressed us with free cash flow of CN¥3.8b, being 211% of its EBIT. So is Shanghai International Airport's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. 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.

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.