Is Alaska Air Group (NYSE:ALK) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Alaska Air Group, Inc. (NYSE:ALK) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Alaska Air Group

What Is Alaska Air Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Alaska Air Group had US$2.41b of debt, an increase on US$2.21b, over one year. However, it does have US$2.45b in cash offsetting this, leading to net cash of US$39.0m.

A Look At Alaska Air Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Alaska Air Group had liabilities of US$5.07b due within 12 months and liabilities of US$6.00b due beyond that. Offsetting these obligations, it had cash of US$2.45b as well as receivables valued at US$341.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$8.28b.

The deficiency here weighs heavily on the US$4.72b 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, Alaska Air Group would likely require a major re-capitalisation if it had to pay its creditors today. Alaska Air Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

The modesty of its debt load may become crucial for Alaska Air Group if management cannot prevent a repeat of the 37% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Alaska Air Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Considering the last two years, Alaska Air Group actually recorded a cash outflow, overall. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

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$39.0m. Unfortunately, though, both its struggle level of total liabilities and its EBIT growth rate leave us concerned about Alaska Air Group So despite the cash, we do think it carries some risks. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Alaska Air Group is showing 1 warning sign in our investment analysis , you should know about...

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.