Does Air France-KLM (EPA:AF) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Air France-KLM SA (EPA:AF) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Air France-KLM

How Much Debt Does Air France-KLM Carry?

As you can see below, Air France-KLM had €5.34b of debt at December 2023, down from €6.90b a year prior. However, it does have €7.25b in cash offsetting this, leading to net cash of €1.91b.

How Healthy Is Air France-KLM's Balance Sheet?

The latest balance sheet data shows that Air France-KLM had liabilities of €15.9b due within a year, and liabilities of €18.0b falling due after that. Offsetting this, it had €7.25b in cash and €2.58b in receivables that were due within 12 months. So it has liabilities totalling €24.2b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €2.42b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Air France-KLM would probably need a major re-capitalization if its creditors were to demand repayment. Given that Air France-KLM has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

It is well worth noting that Air France-KLM's EBIT shot up like bamboo after rain, gaining 62% in the last twelve months. That'll make it easier to manage its debt. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Air France-KLM's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Air France-KLM may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent two years, Air France-KLM recorded free cash flow worth 54% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although Air France-KLM's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €1.91b. And it impressed us with its EBIT growth of 62% over the last year. So although we see some areas for improvement, we're not too worried about Air France-KLM's balance sheet. 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. For example, we've discovered 1 warning sign for Air France-KLM that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.