Does El Al Israel Airlines (TLV:ELAL) Have A Healthy Balance Sheet?

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 El Al Israel Airlines Ltd. (TLV:ELAL) does use debt in its business. But should shareholders be worried about its use of debt?

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. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for El Al Israel Airlines

What Is El Al Israel Airlines's Net Debt?

As you can see below, El Al Israel Airlines had US$958.1m of debt at June 2024, down from US$1.08b a year prior. However, it does have US$1.10b in cash offsetting this, leading to net cash of US$139.7m.

How Healthy Is El Al Israel Airlines' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that El Al Israel Airlines had liabilities of US$1.89b due within 12 months and liabilities of US$1.91b due beyond that. Offsetting this, it had US$1.10b in cash and US$346.4m in receivables that were due within 12 months. So it has liabilities totalling US$2.36b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the US$729.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, El Al Israel Airlines would likely require a major re-capitalisation if it had to pay its creditors today. Given that El Al Israel Airlines 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.

Importantly, El Al Israel Airlines grew its EBIT by 100% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since El Al Israel Airlines will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. El Al Israel Airlines 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. Happily for any shareholders, El Al Israel Airlines actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While El Al Israel Airlines does have more liabilities than liquid assets, it also has net cash of US$139.7m. The cherry on top was that in converted 150% of that EBIT to free cash flow, bringing in US$878m. So we are not troubled with El Al Israel Airlines's debt use. 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. Case in point: We've spotted 1 warning sign for El Al Israel Airlines you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.