The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 companiesSingapore Airlines Limited(SGX:C6L) makes use of debt. But should shareholders be worried about its use of debt?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.
How Much Debt Does Singapore Airlines Carry?
As you can see below, at the end of March 2022, Singapore Airlines had S$12.0b of debt, up from S$11.5b a year ago. Click the image for more detail. However, its balance sheet shows it holds S$14.4b in cash, so it actually has S$2.36b net cash.
A Look At Singapore Airlines' Liabilities
Zooming in on the latest balance sheet data, we can see that Singapore Airlines had liabilities of S$7.87b due within 12 months and liabilities of S$18.0b due beyond that. Offsetting this, it had S$14.4b in cash and S$1.57b in receivables that were due within 12 months. So its liabilities total S$9.93b more than the combination of its cash and short-term receivables.
This is a mountain of leverage even relative to its gargantuan market capitalization of S$15.8b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Singapore Airlines also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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
Over 12 months, Singapore Airlines reported revenue of S$7.6b, which is a gain of 100%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.
So How Risky Is Singapore Airlines?
We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Singapore Airlines lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through S$82m of cash and made a loss of S$962m. With only S$2.36b on the balance sheet, it would appear that its going to need to raise capital again soon. Singapore Airlines's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course.
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