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.' 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 Beijing Capital International Airport Company Limited (HKG:694) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

See our latest analysis for Beijing Capital International Airport

What Is Beijing Capital International Airport's Net Debt?

As you can see below, at the end of December 2021, Beijing Capital International Airport had CN¥7.13b of debt, up from CN¥5.69b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥2.23b, its net debt is less, at about CN¥4.90b.

How Strong Is Beijing Capital International Airport's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Capital International Airport had liabilities of CN¥8.91b due within 12 months and liabilities of CN¥6.07b due beyond that. Offsetting this, it had CN¥2.23b in cash and CN¥911.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥11.8b.

This is a mountain of leverage relative to its market capitalization of CN¥16.7b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Beijing Capital International Airport can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Beijing Capital International Airport made a loss at the EBIT level, and saw its revenue drop to CN¥3.3b, which is a fall of 6.8%. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Beijing Capital International Airport produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable CN¥2.7b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥1.3b of cash over the last year. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Beijing Capital International Airport .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.