Does Air Transport Services Group (NASDAQ:ATSG) have a healthy balance sheet?
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. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Above all, Airline Services Group, Inc. (NASDAQ:ATSG) is in debt. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. If things go really bad, lenders can take over the business. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.
Our analysis indicates that The ATSG is potentially undervalued!
How much debt does Air Transport Services Group have?
The graph below, which you can click on for more details, shows that Air Transport Services Group had debt of US$1.36 billion in June 2022; about the same as the previous year. However, he has $47.2 million in cash to offset this, resulting in a net debt of approximately $1.31 billion.
How strong is Air Transport Services Group’s balance sheet?
According to the latest published balance sheet, Air Transport Services Group had liabilities of US$328.3 million due within 12 months and liabilities of US$1.72 billion due beyond 12 months. In return, he had $47.2 million in cash and $260.3 million in receivables due within 12 months. Thus, its liabilities total $1.74 billion more than the combination of its cash and short-term receivables.
This deficit is considerable compared to its market capitalization of 2.04 billion US dollars, so it suggests that shareholders monitor the use of debt by Air Transport Services Group. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly.
We measure a company’s leverage against its earning power by looking at its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and calculating how easily its earnings before interest and taxes (EBIT ) covers its interest charge (interest coverage). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
With a debt to EBITDA ratio of 2.1, Air Transport Services Group uses debt wisely but responsibly. And the attractive interest coverage (EBIT of 7.2 times interest expense) certainly makes not do everything to dispel this impression. Above all, Air Transport Services Group has increased its EBIT by 58% over the past twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Air Transport Services Group can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Finally, while the taxman may love accounting profits, lenders only accept cash. We must therefore clearly examine whether this EBIT generates a corresponding free cash flow. Over the past three years, Air Transport Services Group has recorded negative free cash flow, in total. Debt is much riskier for companies with unreliable free cash flow, so shareholders must hope that past spending will produce free cash flow in the future.
Our point of view
Air Transport Services Group’s EBIT to free cash flow conversion and the level of total liabilities certainly weighs on it, in our view. But the good news is that it looks like it could easily increase its EBIT. We think Air Transport Services Group’s debt makes it a bit risky, after looking at the aforementioned data points together. Not all risk is bad, as it can increase stock price returns if it pays off, but this leverage risk is worth keeping in mind. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. We have identified 1 warning sign with Air Transport Services Group, and understanding them should be part of your investment process.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
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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.