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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Beijing Capital International Airport Company Limited (HKG:694) makes use of debt. But the real question is whether this debt is making the company risky.

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 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. 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 Beijing Capital International Airport

What Is Beijing Capital International Airport's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Beijing Capital International Airport had CN¥9.00b of debt, an increase on CN¥7.13b, over one year. On the flip side, it has CN¥1.60b in cash leading to net debt of about CN¥7.40b.

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¥14.8b due within 12 months and liabilities of CN¥2.09b due beyond that. Offsetting these obligations, it had cash of CN¥1.60b as well as receivables valued at CN¥763.8m due within 12 months. So its liabilities total CN¥14.5b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥23.4b, so it does suggest shareholders should keep an eye on Beijing Capital International Airport's use of debt. 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 it is future earnings, more than anything, that will determine Beijing Capital International Airport's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Beijing Capital International Airport had a loss before interest and tax, and actually shrunk its revenue by 33%, to CN¥2.2b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Beijing Capital International Airport's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥3.6b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥2.0b in negative free cash flow over the last twelve months. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Beijing Capital International Airport that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.