Does Air China (HKG:753) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Air China Limited (HKG:753) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

Check out our latest analysis for Air China

How Much Debt Does Air China Carry?

As you can see below, at the end of September 2022, Air China had CN¥118.1b of debt, up from CN¥92.0b a year ago. Click the image for more detail. However, it also had CN¥14.6b in cash, and so its net debt is CN¥103.4b.

A Look At Air China's Liabilities

Zooming in on the latest balance sheet data, we can see that Air China had liabilities of CN¥90.6b due within 12 months and liabilities of CN¥171.0b due beyond that. Offsetting this, it had CN¥14.6b in cash and CN¥5.12b in receivables that were due within 12 months. So its liabilities total CN¥241.8b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥133.5b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Air China would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Air China 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, Air China made a loss at the EBIT level, and saw its revenue drop to CN¥59b, which is a fall of 25%. To be frank that doesn't bode well.

Caveat Emptor

While Air China's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥31b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CN¥11b over the last twelve months. That means it's on the risky side of things. For riskier companies like Air China I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.