Is Cathay Pacific Airways (HKG:293) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Cathay Pacific Airways Limited (HKG:293) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Cathay Pacific Airways

What Is Cathay Pacific Airways's Debt?

As you can see below, Cathay Pacific Airways had HK$55.5b of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has HK$19.2b in cash leading to net debt of about HK$36.3b.

How Strong Is Cathay Pacific Airways' Balance Sheet?

The latest balance sheet data shows that Cathay Pacific Airways had liabilities of HK$46.7b due within a year, and liabilities of HK$84.6b falling due after that. On the other hand, it had cash of HK$19.2b and HK$6.38b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$105.7b.

This deficit casts a shadow over the HK$43.8b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Cathay Pacific Airways would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Cathay Pacific Airways 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.

In the last year Cathay Pacific Airways had a loss before interest and tax, and actually shrunk its revenue by 56%, to HK$47b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Cathay Pacific Airways's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$12b at the EBIT level. 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. Not least because it burned through HK$20b in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Cathay Pacific Airways is showing 1 warning sign in our investment analysis , 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.

If you're looking for stocks to buy, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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