Beijing Capital International Airport (HKG:694) Is Making Moderate Use Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Beijing Capital International Airport Company Limited (HKG:694) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Beijing Capital International Airport

How Much Debt Does Beijing Capital International Airport Carry?

As you can see below, at the end of March 2022, Beijing Capital International Airport had CN¥7.38b of debt, up from CN¥6.74b a year ago. Click the image for more detail. On the flip side, it has CN¥1.99b in cash leading to net debt of about CN¥5.39b.

A Look At Beijing Capital International Airport's Liabilities

Zooming in on the latest balance sheet data, we can see that Beijing Capital International Airport had liabilities of CN¥8.85b due within 12 months and liabilities of CN¥6.04b due beyond that. Offsetting these obligations, it had cash of CN¥1.99b as well as receivables valued at CN¥702.0m due within 12 months. So its liabilities total CN¥12.2b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of CN¥17.3b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Beijing Capital International Airport can strengthen its balance sheet over time. 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 Beijing Capital International Airport wasn't profitable at an EBIT level, but managed to grow its revenue by 17%, to CN¥3.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Beijing Capital International Airport produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥2.8b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥993m in negative free cash flow over the last twelve months. So in short it's a really risky stock. For riskier companies like Beijing Capital International Airport I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.