Health Check: How Prudently Does Hainan Meilan International Airport (HKG:357) Use Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Hainan Meilan International Airport Company Limited (HKG:357) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Hainan Meilan International Airport

What Is Hainan Meilan International Airport's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Hainan Meilan International Airport had CN¥2.04b of debt, an increase on CN¥1.96b, over one year. On the flip side, it has CN¥119.4m in cash leading to net debt of about CN¥1.92b.

How Strong Is Hainan Meilan International Airport's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Hainan Meilan International Airport had liabilities of CN¥6.00b due within 12 months and liabilities of CN¥233.0m due beyond that. Offsetting this, it had CN¥119.4m in cash and CN¥311.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.80b.

Given this deficit is actually higher than the company's market capitalization of CN¥4.49b, we think shareholders really should watch Hainan Meilan International Airport's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 Hainan Meilan International Airport'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.

In the last year Hainan Meilan International Airport had a loss before interest and tax, and actually shrunk its revenue by 29%, to CN¥1.1b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Hainan Meilan International Airport's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥119m. When we look at that alongside the significant liabilities, we're not particularly confident 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 CN¥155m. In the meantime, we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Hainan Meilan International Airport that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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

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.