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 Singapore Airlines Limited (SGX:C6L) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 think about a company's use of debt, we first look at cash and debt together.

What Is Singapore Airlines's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Singapore Airlines had S$10.6b of debt in September 2023, down from S$12.0b, one year before. But it also has S$14.2b in cash to offset that, meaning it has S$3.58b net cash.

A Look At Singapore Airlines' Liabilities

Zooming in on the latest balance sheet data, we can see that Singapore Airlines had liabilities of S$14.0b due within 12 months and liabilities of S$14.9b due beyond that. Offsetting this, it had S$14.2b in cash and S$1.41b in receivables that were due within 12 months. So it has liabilities totalling S$13.3b more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Singapore Airlines has a huge market capitalization of S$26.4b, 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. 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. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Singapore Airlines has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, Singapore Airlines actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Singapore Airlines does have more liabilities than liquid assets, it also has net cash of S$3.58b. And it impressed us with free cash flow of S$5.3b, being 239% of its EBIT. So we don't think Singapore Airlines's use of debt is risky. 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 makes us a bit uncomfortable.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.