Does Alaska Air Group (NYSE:ALK) Have A Healthy Balance Sheet?

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

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out the opportunities and risks within the US Airlines industry.

What Is Alaska Air Group's Debt?

As you can see below, Alaska Air Group had US$2.30b of debt at June 2022, down from US$3.19b a year prior. However, its balance sheet shows it holds US$3.43b in cash, so it actually has US$1.12b net cash.

How Strong Is Alaska Air Group's Balance Sheet?

We can see from the most recent balance sheet that Alaska Air Group had liabilities of US$4.90b falling due within a year, and liabilities of US$6.10b due beyond that. Offsetting this, it had US$3.43b in cash and US$401.0m in receivables that were due within 12 months. So its liabilities total US$7.18b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of US$5.26b, we think shareholders really should watch Alaska Air Group's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that Alaska Air Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Although Alaska Air Group made a loss at the EBIT level, last year, it was also good to see that it generated US$487m in EBIT over the last twelve months. 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 Alaska Air Group'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Alaska Air Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Alaska Air Group recorded free cash flow worth a fulsome 90% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

Although Alaska Air Group's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$1.12b. The cherry on top was that in converted 90% of that EBIT to free cash flow, bringing in US$436m. So we don't have any problem with Alaska Air Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Alaska Air Group has 2 warning signs we think you should be aware of.

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. 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.