Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Singapore Airlines Limited (SGX:C6L) makes use of debt. 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. 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.

What Is Singapore Airlines's Debt?

The image below, which you can click on for greater detail, shows that Singapore Airlines had debt of S$9.72b at the end of September 2024, a reduction from S$10.6b over a year. However, it does have S$10.6b in cash offsetting this, leading to net cash of S$911.2m.

A Look At Singapore Airlines' Liabilities

According to the last reported balance sheet, Singapore Airlines had liabilities of S$12.6b due within 12 months, and liabilities of S$14.3b due beyond 12 months. On the other hand, it had cash of S$10.6b and S$1.21b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$15.0b.

This deficit is considerable relative to its very significant market capitalization of S$19.2b, so it does suggest shareholders should keep an eye on Singapore Airlines' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Singapore Airlines boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Singapore Airlines's load is not too heavy, because its EBIT was down 34% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Singapore Airlines may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three 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$911.2m. The cherry on top was that in converted 210% of that EBIT to free cash flow, bringing in S$3.0b. So we don't have any problem with Singapore Airlines's use of debt. 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. Case in point: We've spotted 2 warning signs for Singapore Airlines you should be aware of, and 1 of them shouldn't be ignored.

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.