Does Icelandair Group hf (ICE:ICEAIR) Have A 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.' 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. Importantly, Icelandair Group hf. (ICE:ICEAIR) does carry debt. But is this debt a concern to shareholders?

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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Icelandair Group hf

What Is Icelandair Group hf's Net Debt?

As you can see below, Icelandair Group hf had US$266.5m of debt, at September 2020, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$227.1m in cash, and so its net debt is US$39.5m.

How Strong Is Icelandair Group hf's Balance Sheet?

According to the last reported balance sheet, Icelandair Group hf had liabilities of US$433.4m due within 12 months, and liabilities of US$411.1m due beyond 12 months. Offsetting these obligations, it had cash of US$227.1m as well as receivables valued at US$104.0m due within 12 months. So it has liabilities totalling US$513.5m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$359.1m 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Icelandair Group hf will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Icelandair Group hf had a loss before interest and tax, and actually shrunk its revenue by 53%, to US$692m. To be frank that doesn't bode well.

Caveat Emptor

While Icelandair Group hf's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$222m. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through US$159m in negative free cash flow over the last year. That means it's on the risky side of things. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Icelandair Group hf (at least 3 which are concerning) , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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