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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Beijing Capital International Airport Company Limited (HKG:694) does carry debt. But should shareholders be worried about its use of debt?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Beijing Capital International Airport
How Much Debt Does Beijing Capital International Airport Carry?
As you can see below, Beijing Capital International Airport had CN¥3.33b of debt at June 2019, down from CN¥4.92b a year prior. However, it does have CN¥2.29b in cash offsetting this, leading to net debt of about CN¥1.03b.
A Look At Beijing Capital International Airport's Liabilities
Zooming in on the latest balance sheet data, we can see that Beijing Capital International Airport had liabilities of CN¥7.80b due within 12 months and liabilities of CN¥2.91b due beyond that. Offsetting this, it had CN¥2.29b in cash and CN¥1.42b in receivables that were due within 12 months. So its liabilities total CN¥6.99b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since Beijing Capital International Airport has a market capitalization of CN¥26.9b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Beijing Capital International Airport's net debt is only 0.20 times its EBITDA. And its EBIT covers its interest expense a whopping 25.9 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. On the other hand, Beijing Capital International Airport saw its EBIT drop by 2.4% in the last twelve months. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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 Beijing Capital International Airport's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.