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. We can see that China Express Airlines Co.,LTD (SZSE:002928) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.
See our latest analysis for China Express AirlinesLTD
What Is China Express AirlinesLTD's Debt?
You can click the graphic below for the historical numbers, but it shows that as of March 2023 China Express AirlinesLTD had CN¥5.98b of debt, an increase on CN¥5.68b, over one year. However, it does have CN¥2.34b in cash offsetting this, leading to net debt of about CN¥3.63b.
How Healthy Is China Express AirlinesLTD's Balance Sheet?
The latest balance sheet data shows that China Express AirlinesLTD had liabilities of CN¥5.70b due within a year, and liabilities of CN¥8.24b falling due after that. On the other hand, it had cash of CN¥2.34b and CN¥1.45b worth of receivables due within a year. So its liabilities total CN¥10.1b more than the combination of its cash and short-term receivables.
This is a mountain of leverage relative to its market capitalization of CN¥11.2b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine China Express AirlinesLTD'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.
Over 12 months, China Express AirlinesLTD made a loss at the EBIT level, and saw its revenue drop to CN¥3.1b, which is a fall of 11%. We would much prefer see growth.
Caveat Emptor
Not only did China Express AirlinesLTD's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥1.4b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥251m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that China Express AirlinesLTD is showing 2 warning signs in our investment analysis , and 1 of those can't be ignored...
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.