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Does Singapore Airlines Limited's (SGX:C6L) Debt Level Pose A Problem?

Simply Wall St

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Small-caps and large-caps are wildly popular among investors, however, mid-cap stocks, such as Singapore Airlines Limited (SGX:C6L), with a market capitalization of S$11b, rarely draw their attention from the investing community. However, generally ignored mid-caps have historically delivered better risk adjusted returns than both of those groups. Today we will look at C6L’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Remember this is a very top-level look that focuses exclusively on financial health, so I recommend a deeper analysis into C6L here.

Check out our latest analysis for Singapore Airlines

C6L’s Debt (And Cash Flows)

Over the past year, C6L has ramped up its debt from S$3.1b to S$6.7b , which accounts for long term debt. With this rise in debt, the current cash and short-term investment levels stands at S$3.2b , ready to be used for running the business. On top of this, C6L has produced cash from operations of S$2.8b over the same time period, leading to an operating cash to total debt ratio of 42%, indicating that C6L’s debt is appropriately covered by operating cash.

Can C6L meet its short-term obligations with the cash in hand?

At the current liabilities level of S$7.4b, it appears that the company arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.75x. The current ratio is calculated by dividing current assets by current liabilities.

SGX:C6L Historical Debt, June 2nd 2019

Is C6L’s debt level acceptable?

With debt reaching 49% of equity, C6L may be thought of as relatively highly levered. This is not uncommon for a mid-cap company given that debt tends to be lower-cost and at times, more accessible. We can test if C6L’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For C6L, the ratio of 15.01x suggests that interest is comfortably covered, which means that debtors may be willing to loan the company more money, giving C6L ample headroom to grow its debt facilities.

Next Steps:

Although C6L’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. However, its low liquidity raises concerns over whether current asset management practices are properly implemented for the mid-cap. Keep in mind I haven't considered other factors such as how C6L has been performing in the past. I recommend you continue to research Singapore Airlines to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for C6L’s future growth? Take a look at our free research report of analyst consensus for C6L’s outlook.
  2. Historical Performance: What has C6L's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.