Is Cathay Pacific Airways (HKG:293) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Cathay Pacific Airways Limited (HKG:293) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Cathay Pacific Airways

How Much Debt Does Cathay Pacific Airways Carry?

The chart below, which you can click on for greater detail, shows that Cathay Pacific Airways had HK$61.8b in debt in June 2021; about the same as the year before. On the flip side, it has HK$23.4b in cash leading to net debt of about HK$38.4b.

How Strong Is Cathay Pacific Airways' Balance Sheet?

We can see from the most recent balance sheet that Cathay Pacific Airways had liabilities of HK$46.3b falling due within a year, and liabilities of HK$89.5b due beyond that. Offsetting these obligations, it had cash of HK$23.4b as well as receivables valued at HK$5.53b due within 12 months. So it has liabilities totalling HK$106.8b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$45.6b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Cathay Pacific Airways would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Cathay Pacific Airways made a loss at the EBIT level, and saw its revenue drop to HK$35b, which is a fall of 57%. To be frank that doesn't bode well.

Caveat Emptor

While Cathay Pacific Airways's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping HK$10.0b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of HK$9.5b over the last twelve months. That means it's on the risky side of things. 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 Cathay Pacific Airways's profit, revenue, and operating cashflow have changed over the last few years.

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.

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.

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