David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, Air T, Inc. (NASDAQ:AIRT) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Air T
How Much Debt Does Air T Carry?
As you can see below, Air T had US$88.1m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$12.4m in cash offsetting this, leading to net debt of about US$75.7m.
How Strong Is Air T's Balance Sheet?
According to the last reported balance sheet, Air T had liabilities of US$28.2m due within 12 months, and liabilities of US$91.3m due beyond 12 months. Offsetting this, it had US$12.4m in cash and US$10.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$96.1m.
When you consider that this deficiency exceeds the company's US$78.4m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Air T'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.
Over 12 months, Air T made a loss at the EBIT level, and saw its revenue drop to US$175m, which is a fall of 26%. To be frank that doesn't bode well.
Caveat Emptor
Not only did Air T's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$9.0m 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. Not least because it had negative free cash flow of US$7.8m over the last twelve months. That means it's on the risky side of things. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Air T (at least 2 which are concerning) , and understanding them should be part of your investment process.
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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This article by Simply Wall St is general in nature. 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.
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About NasdaqCM:AIRT
Air T
Through its subsidiaries, provides overnight air cargo, ground equipment sale, and commercial jet engines and parts in the United States and internationally.
Slight and slightly overvalued.
