Health Check: How Cautiously Does Spirit Airlines (NYSE: SAVE) Use Debt?
David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ So it seems like smart money knows that debt – which is usually involved in bankruptcies – is a very important factor, when you assess the level of risk of a business. Like many other companies Spirit Airlines, Inc. (NYSE: SAVE) uses debt. But does this debt worry shareholders?
What risk does debt entail?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, 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 ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
What is the debt of Spirit Airlines?
As you can see below, at the end of June 2021, Spirit Airlines was in debt of $ 3.22 billion, up from $ 2.62 billion a year ago. Click on the image for more details. However, he also had $ 1.97 billion in cash, so his net debt is $ 1.25 billion.
NYSE: SAVE History of Debt to Equity October 5, 2021
A look at the responsibilities of Spirit Airlines
According to the latest published balance sheet, Spirit Airlines had liabilities of US $ 1.60 billion due within 12 months and liabilities of US $ 4.89 billion due beyond 12 months. In compensation for these obligations, he had cash of US $ 1.97 billion as well as receivables valued at US $ 179.0 million maturing within 12 months. Its liabilities therefore total US $ 4.34 billion more than the combination of its cash and short-term receivables.
Given that this deficit is actually greater than the company’s market cap of $ 2.92 billion, we think shareholders should really watch Spirit Airlines’ debt levels, like a parent watching their child do. cycling for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely that shareholders would suffer a significant dilution. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Spirit Airlines can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Year over 12 months, Spirit Airlines recorded a loss in EBIT and saw its revenue fall to $ 2.2 billion, a decrease of 23%. It makes us nervous, to say the least.
While Spirit Airlines’ drop in revenue is about as comforting as a wet blanket, its earnings before interest and taxes (EBIT) can be said to be even less attractive. Its EBIT loss was US $ 704 million. Considering that aside from the liabilities mentioned above, we are nervous about the business. We would like to see big improvements in the short term before we get too interested in the title. It’s fair to say that the loss of US $ 657 million didn’t encourage us either; we would like to see a profit. And until then, we believe it is a risky move. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 2 warning signs with Spirit Airlines (at least 1 that shouldn’t be ignored), and understanding them should be part of your investment process.
Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.
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