Is Singapore Airlines (SGX:C6L) A Risky Investment?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Singapore Airlines Limited (SGX:C6L) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. 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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Singapore Airlines

What Is Singapore Airlines's Net Debt?

As you can see below, at the end of September 2020, Singapore Airlines had S$9.49b of debt, up from S$6.66b a year ago. Click the image for more detail. However, because it has a cash reserve of S$7.78b, its net debt is less, at about S$1.71b.

How Healthy Is Singapore Airlines's Balance Sheet?

The latest balance sheet data shows that Singapore Airlines had liabilities of S$6.85b due within a year, and liabilities of S$13.7b falling due after that. Offsetting these obligations, it had cash of S$7.78b as well as receivables valued at S$790.6m due within 12 months. So it has liabilities totalling S$12.0b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of S$13.0b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Singapore Airlines'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.

Over 12 months, Singapore Airlines made a loss at the EBIT level, and saw its revenue drop to S$9.3b, which is a fall of 45%. That makes us nervous, to say the least.

Caveat Emptor

While Singapore Airlines'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 S$2.1b. 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 S$4.9b of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for Singapore Airlines that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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