Here’s why BOC Aviation (HKG: 2588) is weighed down by debt
David Iben put it well when he said: “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies BOC Aviation Limited (HKG: 2588) uses debt. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that he must raise new equity at low cost, thereby diluting shareholders over the long term. Of course, many companies use debt to finance their growth without negative consequences. When we think of a business’s use of debt, we first look at cash flow and debt together.
See our latest review for BOC Aviation
What is BOC Aviation’s debt?
You can click on the graph below for historical figures, but it shows that as of June 2021, BOC Aviation had a debt of US $ 17.1 billion, an increase from US $ 16.2 billion. , over one year. On the other hand, it has $ 461.4 million in cash, resulting in net debt of around $ 16.7 billion.
How healthy is BOC Aviation’s balance sheet?
We can see from the most recent balance sheet that BOC Aviation had liabilities of US $ 1.96 billion maturing within one year and liabilities of US $ 16.9 billion maturing beyond that. . On the other hand, it had US $ 461.4 million in cash and US $ 267.3 million in receivables due within one year. As a result, its liabilities exceed the sum of its cash and (short-term) receivables by $ 18.2 billion.
This deficit casts a shadow over the $ 6.15 billion company like a towering colossus of mere mortals. We would therefore monitor its record closely, without a doubt. After all, BOC Aviation would likely need a major recapitalization if it were to pay its creditors today.
We measure a company’s debt load relative to its earning capacity by looking at its net debt divided by its earnings before interest, taxes, depreciation, and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT) covers its interest costs (interest coverage). The advantage of this approach is that we take into account both the absolute amount of debt (with net debt versus EBITDA) and the actual interest charges associated with this debt (with its coverage rate). interests).
With a net debt to EBITDA ratio of 17.2, it’s fair to say that BOC Aviation has a significant amount of debt. But the good news is that he enjoys a pretty comforting 2.6x interest coverage, which suggests he can meet his obligations responsibly. Fortunately, BOC Aviation has increased its EBIT by 9.6% over the past year, slowly reducing its debt to earnings. The balance sheet is clearly the area you need to focus on when analyzing debt. But ultimately, the company’s future profitability will decide whether BOC Aviation can strengthen its balance sheet over time. So if you are focused on the future you can check out this free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We must therefore clearly check whether this EBIT generates a corresponding free cash flow. Over the past three years, BOC Aviation has recorded substantial total negative free cash flow. While this may be the result of spending on growth, it makes debt much riskier.
Our point of view
To be frank, BOC Aviation’s conversion of EBIT to free cash flow and its track record of controlling its total liabilities make us rather uncomfortable with its debt levels. But on the positive side, its EBIT growth rate is a good sign and makes us more optimistic. Considering all of the above factors, it appears that BOC Aviation has too much debt. While some investors like this kind of risky game, it is certainly not our cup of tea. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks lie on the balance sheet – far from it. These risks can be difficult to spot. Every business has them, and we’ve spotted 4 warning signs for BOC Aviation (1 of which is potentially serious!) that you should be aware of.
If, after all of this, you’re more interested in a fast-growing company with a strong balance sheet, take a quick look at our list of cash net growth stocks.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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