Does Qantas Airways (ASX:QAN) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Qantas Airways Limited (ASX:QAN) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Qantas Airways

How Much Debt Does Qantas Airways Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Qantas Airways had AU$7.27b of debt, an increase on AU$5.39b, over one year. On the flip side, it has AU$2.61b in cash leading to net debt of about AU$4.66b.

A Look At Qantas Airways' Liabilities

According to the last reported balance sheet, Qantas Airways had liabilities of AU$7.33b due within 12 months, and liabilities of AU$10.5b due beyond 12 months. Offsetting this, it had AU$2.61b in cash and AU$654.0m in receivables that were due within 12 months. So it has liabilities totalling AU$14.5b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the AU$8.73b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Qantas Airways would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Qantas Airways can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Qantas Airways made a loss at the EBIT level, and saw its revenue drop to AU$7.1b, which is a fall of 61%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Qantas Airways's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable AU$1.6b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through AU$2.1b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Qantas Airways you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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. 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.
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