Does Frontier Group Holdings (NASDAQ:ULCC) Have A Healthy Balance Sheet?

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.' 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 Frontier Group Holdings, Inc. (NASDAQ:ULCC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Frontier Group Holdings

What Is Frontier Group Holdings's Debt?

As you can see below, at the end of September 2023, Frontier Group Holdings had US$3.34b of debt, up from US$429.0m a year ago. Click the image for more detail. However, it does have US$640.0m in cash offsetting this, leading to net debt of about US$2.70b.

How Healthy Is Frontier Group Holdings' Balance Sheet?

We can see from the most recent balance sheet that Frontier Group Holdings had liabilities of US$1.69b falling due within a year, and liabilities of US$2.71b due beyond that. Offsetting these obligations, it had cash of US$640.0m as well as receivables valued at US$157.0m due within 12 months. So its liabilities total US$3.60b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$1.52b 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'd watch its balance sheet closely, without a doubt. At the end of the day, Frontier Group Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Frontier Group Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Frontier Group Holdings reported revenue of US$3.6b, which is a gain of 7.9%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months Frontier Group Holdings produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at US$2.0m. 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 burned through US$237m 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. Case in point: We've spotted 1 warning sign for Frontier Group Holdings 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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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.