These 4 Measures Indicate That Alaska Air Group (NYSE:ALK) Is Using Debt Extensively

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.' 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 Alaska Air Group, Inc. (NYSE:ALK) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Alaska Air Group

What Is Alaska Air Group's Net Debt?

The image below, which you can click on for greater detail, shows that Alaska Air Group had debt of US$2.16b at the end of December 2022, a reduction from US$2.55b over a year. But on the other hand it also has US$2.42b in cash, leading to a US$258.0m net cash position.

How Healthy Is Alaska Air Group's Balance Sheet?

The latest balance sheet data shows that Alaska Air Group had liabilities of US$4.51b due within a year, and liabilities of US$5.95b falling due after that. On the other hand, it had cash of US$2.42b and US$296.0m worth of receivables due within a year. So its liabilities total US$7.75b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's US$6.82b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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.

It was also good to see that despite losing money on the EBIT line last year, Alaska Air Group turned things around in the last 12 months, delivering and EBIT of US$726m. 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. 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 saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While Alaska Air Group does have more liabilities than liquid assets, it also has net cash of US$258.0m. Despite its cash we think that Alaska Air Group seems to struggle to convert EBIT to free cash flow, so we are wary of the stock. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Alaska Air Group you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.