Is Air T (NASDAQ:AIRT) Weighed On By Its Debt Load?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Air T, Inc. (NASDAQ:AIRT) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Air T

How Much Debt Does Air T Carry?

As you can see below, at the end of December 2020, Air T had US$128.2m of debt, up from US$91.9m a year ago. Click the image for more detail. However, it does have US$45.6m in cash offsetting this, leading to net debt of about US$82.6m.

A Look At Air T's Liabilities

The latest balance sheet data shows that Air T had liabilities of US$63.7m due within a year, and liabilities of US$94.1m falling due after that. Offsetting these obligations, it had cash of US$45.6m as well as receivables valued at US$22.9m due within 12 months. So it has liabilities totalling US$89.3m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of US$70.8m, we think shareholders really should watch Air T's debt levels, like a parent watching their child ride a bike for the first time. 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Air T will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Air T had a loss before interest and tax, and actually shrunk its revenue by 19%, to US$194m. We would much prefer see growth.

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 US$656k at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$23m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Air T (2 can't be ignored) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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