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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Shenzhen Airport Co., Ltd. (SZSE:000089) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for Shenzhen Airport
How Much Debt Does Shenzhen Airport Carry?
The chart below, which you can click on for greater detail, shows that Shenzhen Airport had CN¥4.37b in debt in June 2023; about the same as the year before. However, it does have CN¥1.93b in cash offsetting this, leading to net debt of about CN¥2.44b.
How Strong Is Shenzhen Airport's Balance Sheet?
The latest balance sheet data shows that Shenzhen Airport had liabilities of CN¥3.72b due within a year, and liabilities of CN¥10.7b falling due after that. Offsetting this, it had CN¥1.93b in cash and CN¥894.3m in receivables that were due within 12 months. So it has liabilities totalling CN¥11.6b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of CN¥13.6b, so it does suggest shareholders should keep an eye on Shenzhen Airport's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shenzhen Airport 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.
In the last year Shenzhen Airport wasn't profitable at an EBIT level, but managed to grow its revenue by 8.3%, to CN¥3.3b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Importantly, Shenzhen Airport had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥431m. 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. Another cause for caution is that is bled CN¥212m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Shenzhen Airport's profit, revenue, and operating cashflow have changed over the last few years.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.