Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Singapore Airlines Limited (SGX:C6L) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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?

You can click the graphic below for the historical numbers, but it shows that Singapore Airlines had S$9.72b of debt in September 2024, down from S$10.6b, one year before. However, it does have S$10.6b in cash offsetting this, leading to net cash of S$911.2m.

How Strong Is Singapore Airlines' Balance Sheet?

The latest balance sheet data shows that Singapore Airlines had liabilities of S$12.6b due within a year, and liabilities of S$14.3b falling due after that. 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 is a mountain of leverage even relative to its gargantuan market capitalization of S$18.8b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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.

The modesty of its debt load may become crucial for Singapore Airlines if management cannot prevent a repeat of the 34% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Singapore Airlines has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Singapore Airlines actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Singapore Airlines does have more liabilities than liquid assets, it also has net cash of S$911.2m. And it impressed us with free cash flow of S$3.0b, being 210% of its EBIT. So we don't have any problem with Singapore Airlines's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it.