Is Icelandair Group hf (ICE:ICEAIR) using debt in a risky way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We can see that Icelandair hf group. (ICE:ICEAIR) uses debt in its business. But does this debt worry shareholders?

Why is debt risky?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash and debt together.

Check out our latest analysis for Icelandair Group hf

How much debt does Icelandair Group hf have?

The image below, which you can click for more details, shows that in June 2022, Icelandair hf group had a debt of $284.3 million, compared to $271.0 million in one year. However, his balance sheet shows that he holds $411.0 million in cash, so he actually has $126.7 million in net cash.

A look at the liabilities of Icelandair Group hf

We can see from the most recent balance sheet that Icelandair Group hf had liabilities of US$784.6 million due in one year, and liabilities of US$524.6 million due beyond. In return, it had $411.0 million in cash and $185.0 million in receivables due within 12 months. It therefore has liabilities totaling $713.2 million more than its cash and short-term receivables, combined.

When you consider that this shortfall exceeds the company’s market capitalization of US$506.1 million, you might well be inclined to take a close look at the balance sheet. In theory, extremely large dilution would be required if the company were forced to repay its debts by raising capital at the current share price. Given that Icelandair Group hf has more cash than debt, we are quite confident that it can manage its debt, despite having a lot of total liabilities. The balance sheet is clearly the area to focus on when analyzing debt. But it is the profits of Icelandair Group hf that will influence the balance sheet in the future. So, if you want to know more about its earnings, it may be worth checking out this graph of its long-term trend.

Last year, Icelandair Group hf was not profitable in terms of EBIT, but managed to increase its revenue by 228%, to $934 million. That’s practically the hole-in-one of revenue growth!

So how risky is Icelandair Group hf?

While the Icelandair hf group lost money in earnings before interest and taxes (EBIT), it actually generated positive free cash flow of $29 million. So, although it is loss-making, it does not seem to have too much short-term balance sheet risk, given net cash. The saving grace for the stock is strong revenue growth of 228% over the past twelve months. But we sincerely believe that the balance sheet is risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 3 warning signs for Icelandair Group hf (2 are potentially serious!) which you should be aware of before investing here.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check out our list of cash-neutral growth stocks right away.

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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.