David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Like many other companies SkyWest, Inc. (NASDAQ:SKYW) uses debt. But should shareholders worry about its use of debt?
When is debt a problem?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.
See our latest analysis for SkyWest
What is SkyWest’s net debt?
The chart below, which you can click on for more details, shows that SkyWest had US$3.11 billion in debt as of December 2021; about the same as the previous year. However, since he has a cash reserve of $860.4 million, his net debt is less, at around $2.25 billion.
How strong is SkyWest’s balance sheet?
Zooming in on the latest balance sheet data, we can see that SkyWest had liabilities of US$1.19 billion due within 12 months and liabilities of US$3.66 billion due beyond. In compensation for these obligations, it had cash of US$860.4 million as well as receivables valued at US$65.3 million and maturing within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $3.93 billion.
This deficit casts a shadow over the $1.35 billion company, like a colossus towering above mere mortals. We would therefore be watching his balance sheet closely, no doubt. Ultimately, SkyWest would likely need a major recapitalization if its creditors were to demand repayment. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine SkyWest’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Last year, SkyWest was not profitable on an EBIT level, but managed to increase its revenue by 28%, to $2.7 billion. With a little luck, the company will be able to progress towards profitability.
Caveat Emptor
Even though SkyWest has managed to grow its revenue quite slickly, the harsh truth is that it is losing money on the EBIT line. Indeed, it lost $62 million in EBIT. Considering the significant liabilities mentioned above, we are extremely wary of this investment. Of course, he may be able to improve his situation with a bit of luck and good execution. But on the plus side, the company actually made a statutory profit of US$112 million and free cash flow of US$150 million. So you could say that there is still a chance that this could put things on the right track. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 3 warning signs for SkyWest you should be aware.
If you are interested in investing in businesses that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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