Is China Eastern Airlines (SHSE:600115) Using Too Much Debt?

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.' 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. We note that China Eastern Airlines Corporation Limited (SHSE:600115) 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 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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

View our latest analysis for China Eastern Airlines

How Much Debt Does China Eastern Airlines Carry?

The image below, which you can click on for greater detail, shows that China Eastern Airlines had debt of CN¥132.3b at the end of September 2024, a reduction from CN¥141.0b over a year. However, it does have CN¥6.64b in cash offsetting this, leading to net debt of about CN¥125.7b.

How Healthy Is China Eastern Airlines' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China Eastern Airlines had liabilities of CN¥119.5b due within 12 months and liabilities of CN¥115.9b due beyond that. Offsetting these obligations, it had cash of CN¥6.64b as well as receivables valued at CN¥6.27b due within 12 months. So it has liabilities totalling CN¥222.5b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥75.0b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, China Eastern Airlines would likely require a major re-capitalisation if it had to pay its creditors today. 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 China Eastern Airlines can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, China Eastern Airlines reported revenue of CN¥131b, which is a gain of 36%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though China Eastern Airlines managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥2.1b at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of CN¥5.8b in the last year. So we think this stock is quite risky. We'd prefer to pass. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how China Eastern Airlines's profit, revenue, and operating cashflow have changed over the last few years.

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.