Does Cathay Pacific Airways (HKG:293) Have A Healthy Balance Sheet?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Cathay Pacific Airways Limited (HKG:293) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Cathay Pacific Airways

What Is Cathay Pacific Airways's Debt?

As you can see below, Cathay Pacific Airways had HK$55.1b of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$19.1b in cash offsetting this, leading to net debt of about HK$36.0b.

How Healthy Is Cathay Pacific Airways' Balance Sheet?

According to the last reported balance sheet, Cathay Pacific Airways had liabilities of HK$43.1b due within 12 months, and liabilities of HK$81.2b due beyond 12 months. On the other hand, it had cash of HK$19.1b and HK$6.54b worth of receivables due within a year. So it has liabilities totalling HK$98.7b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$50.5b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Cathay Pacific Airways 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 it is future earnings, more than anything, that will determine Cathay Pacific Airways'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.

In the last year Cathay Pacific Airways had a loss before interest and tax, and actually shrunk its revenue by 2.9%, to HK$46b. We would much prefer see growth.

Caveat Emptor

Importantly, Cathay Pacific Airways had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$560m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of HK$6.1b. And until that time we think this is a risky stock. For riskier companies like Cathay Pacific Airways I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.