Is Beijing Capital International Airport (HKG:694) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 Beijing Capital International Airport Company Limited (HKG:694) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Beijing Capital International Airport

How Much Debt Does Beijing Capital International Airport Carry?

The image below, which you can click on for greater detail, shows that at June 2023 Beijing Capital International Airport had debt of CN¥10.3b, up from CN¥6.89b in one year. However, because it has a cash reserve of CN¥1.43b, its net debt is less, at about CN¥8.91b.

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

The latest balance sheet data shows that Beijing Capital International Airport had liabilities of CN¥14.7b due within a year, and liabilities of CN¥2.76b falling due after that. On the other hand, it had cash of CN¥1.43b and CN¥1.25b worth of receivables due within a year. So it has liabilities totalling CN¥14.8b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of CN¥15.5b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Beijing Capital 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.

Over 12 months, Beijing Capital International Airport reported revenue of CN¥3.1b, which is a gain of 15%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Beijing Capital International Airport had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥2.8b 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¥2.4b 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Beijing Capital International Airport you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.