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. As with many other companies Shanghai International Airport Co., Ltd. (SHSE:600009) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Shanghai International Airport Carry?

The image below, which you can click on for greater detail, shows that Shanghai International Airport had debt of CN¥2.71b at the end of June 2024, a reduction from CN¥3.20b over a year. However, it does have CN¥15.1b in cash offsetting this, leading to net cash of CN¥12.3b.

How Strong Is Shanghai International Airport's Balance Sheet?

We can see from the most recent balance sheet that Shanghai International Airport had liabilities of CN¥8.80b falling due within a year, and liabilities of CN¥17.4b due beyond that. Offsetting these obligations, it had cash of CN¥15.1b as well as receivables valued at CN¥2.69b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥8.42b.

Of course, Shanghai International Airport has a titanic market capitalization of CN¥84.3b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Shanghai International Airport also has more cash than debt, so we're pretty confident it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Shanghai International Airport turned things around in the last 12 months, delivering and EBIT of CN¥1.8b. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Shanghai International 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shanghai International Airport 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 year, Shanghai International Airport 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Shanghai International Airport has CN¥12.3b in net cash. The cherry on top was that in converted 190% of that EBIT to free cash flow, bringing in CN¥3.4b. So is Shanghai International Airport's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Shanghai International Airport's earnings per share history for free.

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.