International Consolidated Airlines Group (LON:IAG) Has A Pretty Healthy Balance Sheet

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, International Consolidated Airlines Group S.A. (LON:IAG) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for International Consolidated Airlines Group

How Much Debt Does International Consolidated Airlines Group Carry?

As you can see below, at the end of December 2024, International Consolidated Airlines Group had €8.70b of debt, up from €7.12b a year ago. Click the image for more detail. However, it does have €9.80b in cash offsetting this, leading to net cash of €1.10b.

How Strong Is International Consolidated Airlines Group's Balance Sheet?

We can see from the most recent balance sheet that International Consolidated Airlines Group had liabilities of €19.4b falling due within a year, and liabilities of €18.3b due beyond that. Offsetting this, it had €9.80b in cash and €3.13b in receivables that were due within 12 months. So it has liabilities totalling €24.7b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's huge €20.1b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Given that International Consolidated Airlines Group 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.

Also positive, International Consolidated Airlines Group grew its EBIT by 25% in the last year, and that should make it easier to pay down debt, going forward. 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 International Consolidated Airlines Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. International Consolidated Airlines Group 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. During the last three years, International Consolidated Airlines Group produced sturdy free cash flow equating to 61% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While International Consolidated Airlines Group does have more liabilities than liquid assets, it also has net cash of €1.10b. And we liked the look of last year's 25% year-on-year EBIT growth. So we don't have any problem with International Consolidated Airlines Group's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with International Consolidated Airlines Group .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.