Southwest Airlines (NYSE:LUV) Has Debt But No Earnings; Should You Worry?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Southwest Airlines Co. (NYSE:LUV) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Southwest Airlines

What Is Southwest Airlines's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Southwest Airlines had US$10.8b of debt, an increase on US$5.15b, over one year. But on the other hand it also has US$14.3b in cash, leading to a US$3.58b net cash position.

How Healthy Is Southwest Airlines' Balance Sheet?

According to the last reported balance sheet, Southwest Airlines had liabilities of US$8.18b due within 12 months, and liabilities of US$18.2b due beyond 12 months. On the other hand, it had cash of US$14.3b and US$937.0m worth of receivables due within a year. So its liabilities total US$11.1b more than the combination of its cash and short-term receivables.

Southwest Airlines has a very large market capitalization of US$31.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Southwest Airlines boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Southwest Airlines'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.

In the last year Southwest Airlines had a loss before interest and tax, and actually shrunk its revenue by 68%, to US$6.9b. To be frank that doesn't bode well.

So How Risky Is Southwest Airlines?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Southwest Airlines had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of US$491m and booked a US$2.9b accounting loss. With only US$3.58b on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 instance, we've identified 1 warning sign for Southwest Airlines that you should be aware of.

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.

If you decide to trade Southwest Airlines, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.