Does Delta Air Lines Inc’s (NYSE:DAL) Debt Level Pose A Problem?

Delta Air Lines Inc (NYSE:DAL), a large-cap worth US$40.28b, comes to mind for investors seeking a strong and reliable stock investment. Risk-averse investors who are attracted to diversified streams of revenue and strong capital returns tend to seek out these large companies. But, its financial health remains the key to continued success. I will provide an overview of Delta Air Lines’s financial liquidity and leverage to give you an idea of Delta Air Lines’s position to take advantage of potential acquisitions or comfortably endure future downturns. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into DAL here.

Check out our latest analysis for Delta Air Lines

Does DAL produce enough cash relative to debt?

DAL’s debt levels surged from US$9.02b to US$10.99b over the last 12 months , which is made up of current and long term debt. With this increase in debt, the current cash and short-term investment levels stands at US$2.41b for investing into the business. On top of this, DAL has produced US$7.76b in operating cash flow during the same period of time, leading to an operating cash to total debt ratio of 70.6%, meaning that DAL’s debt is appropriately covered by operating cash. This ratio can also be a sign of operational efficiency as an alternative to return on assets. In DAL’s case, it is able to generate 0.71x cash from its debt capital.

Can DAL pay its short-term liabilities?

At the current liabilities level of US$19.27b liabilities, it appears that the company is not able to meet these obligations given the level of current assets of US$7.64b, with a current ratio of 0.4x below the prudent level of 3x.

NYSE:DAL Historical Debt September 5th 18
NYSE:DAL Historical Debt September 5th 18

Is DAL’s debt level acceptable?

DAL is a relatively highly levered company with a debt-to-equity of 85.5%. This is not unusual for large-caps since debt tends to be less expensive than equity because interest payments are tax deductible. Accordingly, large companies often have lower cost of capital due to easily obtained financing, providing an advantage over smaller companies. We can test if DAL’s debt levels are sustainable by measuring interest payments against earnings of a company. A company generating earnings before interest and tax (EBIT) at least three times its net interest payments is considered financially sound. For DAL, the ratio of 14.17x suggests that interest is comfortably covered. It is considered a responsible and reassuring practice to maintain high interest coverage, which makes DAL and other large-cap investments thought to be safe.

Next Steps:

Although DAL’s debt level is towards the higher end of the spectrum, its cash flow coverage seems adequate to meet debt obligations which means its debt is being efficiently utilised. Though its low liquidity raises concerns over whether current asset management practices are properly implemented for the large-cap. Keep in mind I haven’t considered other factors such as how DAL has been performing in the past. I suggest you continue to research Delta Air Lines to get a better picture of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for DAL’s future growth? Take a look at our free research report of analyst consensus for DAL’s outlook.
  2. Valuation: What is DAL worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether DAL is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.