Is Singapore Airlines (SGX:C6L) Weighed On By Its Debt Load?

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 can see that Singapore Airlines Limited (SGX:C6L) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. 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, at the end of March 2021, Singapore Airlines had S$11.5b of debt, up from S$9.95b a year ago. Click the image for more detail. However, it also had S$8.17b in cash, and so its net debt is S$3.30b.

A Look At Singapore Airlines' Liabilities

We can see from the most recent balance sheet that Singapore Airlines had liabilities of S$5.71b falling due within a year, and liabilities of S$15.6b due beyond that. Offsetting this, it had S$8.17b in cash and S$939.5m in receivables that were due within 12 months. So it has liabilities totalling S$12.2b more than its cash and near-term receivables, combined.

This is a mountain of leverage even relative to its gargantuan market capitalization of S$14.6b. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Singapore Airlines made a loss at the EBIT level, and saw its revenue drop to S$3.8b, which is a fall of 76%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Singapore Airlines'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 S$2.5b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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$6.1b 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. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Singapore Airlines is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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