Is Air New Zealand (NZSE:AIR) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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, Air New Zealand Limited (NZSE:AIR) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Air New Zealand

What Is Air New Zealand's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 Air New Zealand had debt of NZ$1.84b, up from NZ$1.55b in one year. However, it also had NZ$1.79b in cash, and so its net debt is NZ$50.0m.

How Strong Is Air New Zealand's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Air New Zealand had liabilities of NZ$3.17b due within 12 months and liabilities of NZ$3.50b due beyond that. Offsetting these obligations, it had cash of NZ$1.79b as well as receivables valued at NZ$374.0m due within 12 months. So it has liabilities totalling NZ$4.51b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the NZ$2.66b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Air New Zealand would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Air New Zealand can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Air New Zealand reported revenue of NZ$2.7b, which is a gain of 8.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Air New Zealand produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable NZ$670m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of NZ$591m. In the meantime, we consider the stock to be 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Air New Zealand you should know about.

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.