Is Wizz Air Holdings (LON:WIZZ) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that Wizz Air Holdings Plc (LON:WIZZ) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Wizz Air Holdings

What Is Wizz Air Holdings's Net Debt?

As you can see below, at the end of September 2021, Wizz Air Holdings had €890.1m of debt, up from €357.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds €1.51b in cash, so it actually has €621.6m net cash.

How Healthy Is Wizz Air Holdings' Balance Sheet?

The latest balance sheet data shows that Wizz Air Holdings had liabilities of €1.53b due within a year, and liabilities of €2.80b falling due after that. On the other hand, it had cash of €1.51b and €90.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.73b.

While this might seem like a lot, it is not so bad since Wizz Air Holdings has a market capitalization of €5.94b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Wizz Air Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Wizz Air Holdings had a loss before interest and tax, and actually shrunk its revenue by 26%, to €1.1b. To be frank that doesn't bode well.

So How Risky Is Wizz Air Holdings?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Wizz Air Holdings had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of €263m and booked a €446m accounting loss. Given it only has net cash of €621.6m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. For example - Wizz Air Holdings has 2 warning signs we think 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. 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.