Is Icelandair Group hf (ICE:ICEAIR) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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.

View our latest analysis for Icelandair Group hf

What Is Icelandair Group hf's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Icelandair Group hf had debt of US$284.3m, up from US$271.0m in one year. However, its balance sheet shows it holds US$411.0m in cash, so it actually has US$126.7m 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$784.6m falling due within a year, and liabilities of US$524.6m due beyond that. Offsetting this, it had US$411.0m in cash and US$185.0m in receivables that were due within 12 months. So it has liabilities totalling US$713.2m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's US$506.1m 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. 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. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Icelandair Group hf wasn't profitable at an EBIT level, but managed to grow its revenue by 228%, to US$934m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Icelandair Group hf?

While Icelandair Group hf lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$29m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The saving grace for the stock is the strong revenue growth of 228% over the last twelve months. But we genuinely do think the balance sheet is a risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 3 warning signs for Icelandair Group hf (2 are potentially serious!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.