Is Mesa Air Group (NASDAQ:MESA) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, Mesa Air Group, Inc. (NASDAQ:MESA) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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$717.7m of debt in December 2020, down from US$798.9m, one year before. However, it also had US$181.3m in cash, and so its net debt is US$536.4m.

How Healthy Is Mesa Air Group's Balance Sheet?

The latest balance sheet data shows that Mesa Air Group had liabilities of US$287.9m due within a year, and liabilities of US$782.6m falling due after that. Offsetting these obligations, it had cash of US$181.3m as well as receivables valued at US$15.4m due within 12 months. So its liabilities total US$873.8m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$410.8m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Mesa Air Group 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 Mesa Air Group can strengthen its balance sheet over time. 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 had a loss before interest and tax, and actually shrunk its revenue by 30%, to US$511m. That makes us nervous, to say the least.

Caveat Emptor

While Mesa Air Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost US$15m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. But on the bright side the company actually produced a statutory profit of US$31m and free cash flow of US$197m. So one might argue that there's still a chance it can get things on the right track. 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. We've identified 5 warning signs with Mesa Air Group , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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