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.' 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. We can see that AirTrip Corp. (TSE:6191) 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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for AirTrip
What Is AirTrip's Net Debt?
The image below, which you can click on for greater detail, shows that AirTrip had debt of JP¥3.97b at the end of December 2023, a reduction from JP¥5.76b over a year. However, it does have JP¥15.2b in cash offsetting this, leading to net cash of JP¥11.2b.
A Look At AirTrip's Liabilities
The latest balance sheet data shows that AirTrip had liabilities of JP¥10.8b due within a year, and liabilities of JP¥3.75b falling due after that. On the other hand, it had cash of JP¥15.2b and JP¥2.44b worth of receivables due within a year. So it can boast JP¥3.08b more liquid assets than total liabilities.
This short term liquidity is a sign that AirTrip could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that AirTrip has more cash than debt is arguably a good indication that it can manage its debt safely.
Notably, AirTrip's EBIT launched higher than Elon Musk, gaining a whopping 423% on last year. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if AirTrip can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While AirTrip has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, AirTrip actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
While it is always sensible to investigate a company's debt, in this case AirTrip has JP¥11.2b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of JP¥3.4b, being 113% of its EBIT. So we don't think AirTrip's use of debt is risky. 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. Case in point: We've spotted 3 warning signs for AirTrip you should be aware of.
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. 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.
About TSE:6191
Flawless balance sheet with solid track record.
