Does Icelandair Group hf (ICE:ICEAIR) Have A Healthy Balance Sheet?

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

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Icelandair Group hf

What Is Icelandair Group hf's Net Debt?

As you can see below, at the end of September 2023, Icelandair Group hf had US$281.6m of debt, up from US$267.7m a year ago. Click the image for more detail. But it also has US$371.7m in cash to offset that, meaning it has US$90.1m net cash.

A Look At Icelandair Group hf's Liabilities

Zooming in on the latest balance sheet data, we can see that Icelandair Group hf had liabilities of US$659.2m due within 12 months and liabilities of US$616.3m due beyond that. Offsetting these obligations, it had cash of US$371.7m as well as receivables valued at US$162.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$741.1m.

The deficiency here weighs heavily on the US$440.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Icelandair Group hf would likely require a major re-capitalisation if it had to pay its creditors today. Given that Icelandair Group hf 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.

We also note that Icelandair Group hf improved its EBIT from a last year's loss to a positive US$54m. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Icelandair Group hf's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Icelandair Group hf 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, Icelandair Group hf actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Icelandair Group hf does have more liabilities than liquid assets, it also has net cash of US$90.1m. And it impressed us with free cash flow of US$117m, being 217% of its EBIT. So although we see some areas for improvement, we're not too worried about Icelandair Group hf's balance sheet. 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 Icelandair Group hf is showing 1 warning sign in our investment analysis , you should know about...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.