Here's Why Beijing Capital International Airport (HKG:694) Can Afford Some Debt

By
Simply Wall St
Published
November 26, 2021
SEHK:694
Source: Shutterstock

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.' 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 note that Beijing Capital International Airport Company Limited (HKG:694) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider 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 September 2021 Beijing Capital International Airport had CN¥7.01b of debt, an increase on CN¥2.97b, over one year. However, because it has a cash reserve of CN¥2.43b, its net debt is less, at about CN¥4.57b.

debt-equity-history-analysis
SEHK:694 Debt to Equity History November 26th 2021

How Strong Is Beijing Capital International Airport's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Capital International Airport had liabilities of CN¥8.29b due within 12 months and liabilities of CN¥5.76b due beyond that. On the other hand, it had cash of CN¥2.43b and CN¥1.05b worth of receivables due within a year. So its liabilities total CN¥10.6b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Beijing Capital International Airport is worth CN¥17.9b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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 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 39%, to CN¥3.4b. That makes us nervous, to say the least.

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¥2.5b. 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. However, it doesn't help that it burned through CN¥1.4b of cash over the last year. So in short it's a really risky stock. 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 Beijing Capital International Airport's profit, revenue, and operating cashflow have changed over the last few years.

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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