Icelandair Group hf (ICE:ICEAIR) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Icelandair Group hf. (ICE:ICEAIR) does use debt in its business. 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 Icelandair Group hf

What Is Icelandair Group hf's Net Debt?

The chart below, which you can click on for greater detail, shows that Icelandair Group hf had US$263.3m in debt in September 2021; about the same as the year before. But it also has US$276.9m in cash to offset that, meaning it has US$13.6m net cash.

A Look At Icelandair Group hf's Liabilities

We can see from the most recent balance sheet that Icelandair Group hf had liabilities of US$490.5m falling due within a year, and liabilities of US$476.6m due beyond that. Offsetting this, it had US$276.9m in cash and US$128.5m in receivables that were due within 12 months. So its liabilities total US$561.6m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$497.1m, we think shareholders really should watch Icelandair Group hf's debt levels, like a parent watching their child ride a bike for the first time. 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. 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. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Icelandair Group hf made a loss at the EBIT level, and saw its revenue drop to US$437m, which is a fall of 37%. To be frank that doesn't bode well.

So How Risky Is Icelandair Group hf?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Icelandair Group hf 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 US$204m and booked a US$148m accounting loss. Given it only has net cash of US$13.6m, 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. 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 2 warning signs for Icelandair Group hf you should be aware of, and 1 of them makes us a bit uncomfortable.

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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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.