Is Singapore Airlines (SGX:C6L) Using Too Much 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 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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Singapore Airlines

What Is Singapore Airlines's Net Debt?

As you can see below, Singapore Airlines had S$11.2b of debt at March 2023, down from S$12.2b a year prior. However, it does have S$16.8b in cash offsetting this, leading to net cash of S$5.62b.

A Look At Singapore Airlines' Liabilities

We can see from the most recent balance sheet that Singapore Airlines had liabilities of S$13.7b falling due within a year, and liabilities of S$15.2b due beyond that. Offsetting this, it had S$16.8b in cash and S$1.45b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$10.6b.

Singapore Airlines has a very large market capitalization of S$38.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Singapore Airlines boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Singapore Airlines made a loss at the EBIT level, last year, it was also good to see that it generated S$2.7b in EBIT over the last twelve months. 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 Singapore Airlines 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Singapore Airlines has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Singapore Airlines actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Singapore Airlines does have more liabilities than liquid assets, it also has net cash of S$5.62b. And it impressed us with free cash flow of S$7.4b, being 274% of its EBIT. So is Singapore Airlines's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Singapore Airlines is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

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.