Ryanair Holdings (ISE:RY4C) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Ryanair Holdings plc (ISE:RY4C) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Ryanair Holdings

What Is Ryanair Holdings's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Ryanair Holdings had debt of €5.32b, up from €4.09b in one year. However, it also had €3.46b in cash, and so its net debt is €1.86b.

How Strong Is Ryanair Holdings' Balance Sheet?

The latest balance sheet data shows that Ryanair Holdings had liabilities of €3.88b due within a year, and liabilities of €4.13b falling due after that. On the other hand, it had cash of €3.46b and €34.7m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.52b.

While this might seem like a lot, it is not so bad since Ryanair Holdings has a huge market capitalization of €19.5b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. 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 Ryanair Holdings'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.

In the last year Ryanair Holdings had a loss before interest and tax, and actually shrunk its revenue by 68%, to €2.7b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Ryanair Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €761m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled €1.7b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Ryanair Holdings (1 is concerning) you should be aware of.

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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