These 4 Measures Indicate That Hainan Meilan International Airport (HKG:357) Is Using Debt Extensively

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.' 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 can see that Hainan Meilan International Airport Company Limited (HKG:357) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Hainan Meilan International Airport

What Is Hainan Meilan International Airport's Debt?

You can click the graphic below for the historical numbers, but it shows that Hainan Meilan International Airport had CN¥20.0m of debt in June 2022, down from CN¥2.35b, one year before. But on the other hand it also has CN¥125.1m in cash, leading to a CN¥105.1m net cash position.

A Look At Hainan Meilan International Airport's Liabilities

According to the last reported balance sheet, Hainan Meilan International Airport had liabilities of CN¥6.09b due within 12 months, and liabilities of CN¥209.5m due beyond 12 months. Offsetting these obligations, it had cash of CN¥125.1m as well as receivables valued at CN¥322.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.85b.

This deficit is considerable relative to its market capitalization of CN¥7.45b, so it does suggest shareholders should keep an eye on Hainan Meilan International Airport's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Hainan Meilan International Airport also has more cash than debt, so we're pretty confident it can manage its debt safely.

Shareholders should be aware that Hainan Meilan International Airport's EBIT was down 68% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Hainan Meilan International Airport 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Hainan Meilan International Airport may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Hainan Meilan International Airport burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Hainan Meilan International Airport does have more liabilities than liquid assets, it also has net cash of CN¥105.1m. Despite its cash we think that Hainan Meilan International Airport seems to struggle to grow its EBIT, so we are wary of the stock. 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. To that end, you should be aware of the 1 warning sign we've spotted with Hainan Meilan International Airport .

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.

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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.