We Think Beijing Capital International Airport (HKG:694) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Beijing Capital International Airport Company Limited (HKG:694) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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. 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. When we think about a company's use of debt, we first look at 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 December 2020, Beijing Capital International Airport had CN¥5.69b of debt, up from CN¥2.29b a year ago. Click the image for more detail. On the flip side, it has CN¥2.34b in cash leading to net debt of about CN¥3.36b.

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

The latest balance sheet data shows that Beijing Capital International Airport had liabilities of CN¥9.60b due within a year, and liabilities of CN¥3.59b falling due after that. Offsetting this, it had CN¥2.34b in cash and CN¥871.6m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥9.98b.

While this might seem like a lot, it is not so bad since Beijing Capital International Airport has a market capitalization of CN¥23.1b, 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. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Beijing Capital International Airport made a loss at the EBIT level, and saw its revenue drop to CN¥3.6b, which is a fall of 67%. 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¥2.3b 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥798m of cash over the last year. So suffice it to say we do consider the stock to be risky. 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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This article by Simply Wall St is general in nature. 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.
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