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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Allegiant Travel Company (NASDAQ:ALGT) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
Check out our latest analysis for Allegiant Travel
How Much Debt Does Allegiant Travel Carry?
The image below, which you can click on for greater detail, shows that at December 2020 Allegiant Travel had debt of US$1.53b, up from US$1.31b in one year. However, it also had US$685.2m in cash, and so its net debt is US$846.9m.
How Healthy Is Allegiant Travel’s Balance Sheet?
We can see from the most recent balance sheet that Allegiant Travel had liabilities of US$689.3m falling due within a year, and liabilities of US$1.87b due beyond that. Offsetting these obligations, it had cash of US$685.2m as well as receivables valued at US$192.2m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.68b.
While this might seem like a lot, it is not so bad since Allegiant Travel has a market capitalization of US$4.10b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution. There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Allegiant Travel’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 Allegiant Travel had a loss before interest and tax, and actually shrunk its revenue by 46%, to US$990m. That makes us nervous, to say the least.
Not only did Allegiant Travel’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$129m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn’t help that it burned through US$47m of cash over the last year. So suffice it to say we do consider the stock to be risky. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we’ve spotted 3 warning signs for Allegiant Travel (of which 1 is a bit concerning!) you should know about.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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