These 4 Measures Indicate That Singapore Airlines (SGX:C6L) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 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?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Singapore Airlines

What Is Singapore Airlines's Net Debt?

As you can see below, Singapore Airlines had S$10.6b of debt at September 2023, down from S$12.0b a year prior. But on the other hand it also has S$14.2b in cash, leading to a S$3.58b net cash position.

How Healthy Is Singapore Airlines' Balance Sheet?

We can see from the most recent balance sheet that Singapore Airlines had liabilities of S$14.0b falling due within a year, and liabilities of S$14.9b due beyond that. Offsetting these obligations, it had cash of S$14.2b as well as receivables valued at S$1.41b due within 12 months. So its liabilities total S$13.3b more than the combination of its cash and short-term receivables.

Singapore Airlines has a very large market capitalization of S$26.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Singapore Airlines boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Singapore Airlines grew its EBIT by 144% over twelve months. That boost will make it even easier to pay down debt going forward. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Singapore Airlines may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Singapore Airlines actually produced more free cash flow than EBIT. 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$3.58b. The cherry on top was that in converted 239% of that EBIT to free cash flow, bringing in S$5.3b. So is Singapore Airlines's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Singapore Airlines you should be aware of, and 1 of them can't be ignored.

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.