Is Beijing Capital International Airport (HKG:694) Using Too Much 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. Importantly, Beijing Capital International Airport Company Limited (HKG:694) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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 Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Beijing Capital International Airport had CN¥4.76b of debt, an increase on CN¥3.41b, over one year. On the flip side, it has CN¥2.46b in cash leading to net debt of about CN¥2.30b.

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

We can see from the most recent balance sheet that Beijing Capital International Airport had liabilities of CN¥9.76b falling due within a year, and liabilities of CN¥3.79b due beyond that. On the other hand, it had cash of CN¥2.46b and CN¥815.9m worth of receivables due within a year. So its liabilities total CN¥10.3b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Beijing Capital International Airport has a market capitalization of CN¥18.1b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. When analysing debt levels, the balance sheet is the obvious place to start. 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 72%, to CN¥2.8b. 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). Indeed, it lost a very considerable CN¥2.9b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥2.6b in negative free cash flow over the last twelve months. So in short it's a really risky stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Beijing Capital International Airport is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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