Is Air Industries Group (NYSEMKT:AIRI) Using Too Much Debt?

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. We note that Air Industries Group (NYSEMKT:AIRI) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Air Industries Group

What Is Air Industries Group's Net Debt?

As you can see below, at the end of September 2020, Air Industries Group had US$29.4m of debt, up from US$23.1m a year ago. Click the image for more detail. However, it also had US$1.46m in cash, and so its net debt is US$27.9m.

How Strong Is Air Industries Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Air Industries Group had liabilities of US$35.4m due within 12 months and liabilities of US$12.0m due beyond that. Offsetting this, it had US$1.46m in cash and US$9.75m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$36.2m.

This deficit is considerable relative to its market capitalization of US$37.8m, so it does suggest shareholders should keep an eye on Air Industries Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 Industries Group 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.

In the last year Air Industries Group had a loss before interest and tax, and actually shrunk its revenue by 6.2%, to US$49m. We would much prefer see growth.

Caveat Emptor

Importantly, Air Industries Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$2.6m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled US$6.2m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - Air Industries Group has 3 warning signs (and 1 which is potentially serious) we think you should know about.

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.

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