Is Spirit Airlines Inc's (NYSE:SAVE) Balance Sheet A Threat To Its Future?

Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as Spirit Airlines Inc (NYSE:SAVE), with a market cap of US$2.77b, often get neglected by retail investors. While they are less talked about as an investment category, mid-cap risk-adjusted returns have generally been better than more commonly focused stocks that fall into the small- or large-cap categories. Today we will look at SAVE’s financial liquidity and debt levels, which are strong indicators for whether the company can weather economic downturns or fund strategic acquisitions for future growth. Don’t forget that this is a general and concentrated examination of Spirit Airlines’s financial health, so you should conduct further analysis into SAVE here.

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Does SAVE produce enough cash relative to debt?

Over the past year, SAVE has ramped up its debt from US$1.08b to US$1.86b – this includes both the current and long-term debt. With this increase in debt, the current cash and short-term investment levels stands at US$999.71m for investing into the business. On top of this, SAVE has generated US$423.34m in operating cash flow in the last twelve months, resulting in an operating cash to total debt ratio of 22.72%, meaning that SAVE’s operating cash is sufficient to cover its debt. This ratio can also be interpreted as a measure of efficiency as an alternative to return on assets. In SAVE’s case, it is able to generate 0.23x cash from its debt capital.

Can SAVE meet its short-term obligations with the cash in hand?

At the current liabilities level of US$1.05b liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.24x. For Airlines companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Is SAVE’s debt level acceptable?

With total debt exceeding equities, SAVE is considered a highly levered company. This is not unusual for mid-caps as debt tends to be a cheaper and faster source of funding for some businesses. We can test if SAVE’s debt levels are sustainable by measuring interest payments against earnings of a company. Ideally, earnings before interest and tax (EBIT) should cover net interest by at least three times. For SAVE, the ratio of 10.14x suggests that interest is comfortably covered, which means that lenders may be less hesitant to lend out more funding as SAVE’s high interest coverage is seen as responsible and safe practice.

Next Steps:

SAVE’s cash flow coverage indicates it could improve its operating efficiency in order to meet demand for debt repayments should unforeseen events arise. However, the company exhibits proper management of current assets and upcoming liabilities. This is only a rough assessment of financial health, and I'm sure SAVE has company-specific issues impacting its capital structure decisions. You should continue to research Spirit Airlines to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for SAVE’s future growth? Take a look at our free research report of analyst consensus for SAVE’s outlook.
2. Historical Performance: What has SAVE's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.