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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Eastern Air Logistics Co., Ltd. (SHSE:601156) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Eastern Air Logistics Carry?
As you can see below, at the end of December 2023, Eastern Air Logistics had CN¥2.34b of debt, up from CN¥557.9m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥9.24b in cash, so it actually has CN¥6.90b net cash.
How Healthy Is Eastern Air Logistics' Balance Sheet?
We can see from the most recent balance sheet that Eastern Air Logistics had liabilities of CN¥5.57b falling due within a year, and liabilities of CN¥6.20b due beyond that. Offsetting these obligations, it had cash of CN¥9.24b as well as receivables valued at CN¥1.95b due within 12 months. So it has liabilities totalling CN¥575.2m more than its cash and near-term receivables, combined.
Having regard to Eastern Air Logistics' size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥28.9b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Eastern Air Logistics boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact Eastern Air Logistics's saving grace is its low debt levels, because its EBIT has tanked 30% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Eastern Air Logistics'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 company can only pay off debt with cold hard cash, not accounting profits. While Eastern Air Logistics 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 three years, Eastern Air Logistics recorded free cash flow worth a fulsome 92% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.
Summing Up
We could understand if investors are concerned about Eastern Air Logistics's liabilities, but we can be reassured by the fact it has has net cash of CN¥6.90b. And it impressed us with free cash flow of CN¥4.7b, being 92% of its EBIT. So we don't have any problem with Eastern Air Logistics's use of debt. 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. To that end, you should be aware of the 1 warning sign we've spotted with Eastern Air Logistics .
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.