Is Wizz Air Holdings (LON:WIZZ) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that Wizz Air Holdings Plc (LON:WIZZ) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for Wizz Air Holdings

What Is Wizz Air Holdings's Debt?

As you can see below, at the end of September 2023, Wizz Air Holdings had €1.16b of debt, up from €1.05b a year ago. Click the image for more detail. However, its balance sheet shows it holds €1.73b in cash, so it actually has €568.0m net cash.

How Strong Is Wizz Air Holdings' Balance Sheet?

We can see from the most recent balance sheet that Wizz Air Holdings had liabilities of €2.93b falling due within a year, and liabilities of €4.71b due beyond that. Offsetting these obligations, it had cash of €1.73b as well as receivables valued at €230.5m due within 12 months. So it has liabilities totalling €5.69b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the €2.35b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Wizz Air Holdings would likely require a major re-capitalisation if it had to pay its creditors today. Wizz Air Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

Notably, Wizz Air Holdings made a loss at the EBIT level, last year, but improved that to positive EBIT of €17m in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wizz Air Holdings'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. While Wizz Air Holdings 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. Happily for any shareholders, Wizz Air Holdings actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although Wizz Air Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of €568.0m. The cherry on top was that in converted 282% of that EBIT to free cash flow, bringing in €48m. Despite its cash we think that Wizz Air Holdings seems to struggle to handle its total liabilities, so we are wary of the stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Wizz Air Holdings is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.