Health Check: How Prudently Does Mesa Air Group (NASDAQ:MESA) Use Debt?

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 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. We can see that Mesa Air Group, Inc. (NASDAQ:MESA) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Mesa Air Group

What Is Mesa Air Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Mesa Air Group had US$606.5m of debt in December 2022, down from US$654.4m, one year before. However, it also had US$56.1m in cash, and so its net debt is US$550.4m.

How Strong Is Mesa Air Group's Balance Sheet?

We can see from the most recent balance sheet that Mesa Air Group had liabilities of US$186.3m falling due within a year, and liabilities of US$673.5m due beyond that. Offsetting these obligations, it had cash of US$56.1m as well as receivables valued at US$13.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$790.6m.

This deficit casts a shadow over the US$86.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Mesa Air Group would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Mesa Air Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Mesa Air Group wasn't profitable at an EBIT level, but managed to grow its revenue by 5.9%, to US$530m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Mesa Air Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at US$7.5m. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the fact is that it incinerated US$28m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for Mesa Air Group (1 doesn't sit too well with us) you should be aware of.

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.