David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We note that Guangzhou Baiyun International Airport Company Limited (SHSE:600004) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Guangzhou Baiyun International Airport
How Much Debt Does Guangzhou Baiyun International Airport Carry?
The image below, which you can click on for greater detail, shows that Guangzhou Baiyun International Airport had debt of CN¥295.5m at the end of September 2023, a reduction from CN¥1.00b over a year. However, it does have CN¥2.44b in cash offsetting this, leading to net cash of CN¥2.14b.
How Strong Is Guangzhou Baiyun International Airport's Balance Sheet?
We can see from the most recent balance sheet that Guangzhou Baiyun International Airport had liabilities of CN¥6.24b falling due within a year, and liabilities of CN¥2.84b due beyond that. On the other hand, it had cash of CN¥2.44b and CN¥1.37b worth of receivables due within a year. So its liabilities total CN¥5.27b more than the combination of its cash and short-term receivables.
Guangzhou Baiyun International Airport has a market capitalization of CN¥25.2b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Guangzhou Baiyun International Airport boasts net cash, so it's fair to say it does not have a heavy 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 Guangzhou Baiyun International Airport'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.
In the last year Guangzhou Baiyun International Airport wasn't profitable at an EBIT level, but managed to grow its revenue by 8.5%, to CN¥5.3b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is Guangzhou Baiyun International Airport?
Although Guangzhou Baiyun International Airport had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥1.6b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. For riskier companies like Guangzhou Baiyun International Airport I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.