Here’s why Air Transport Services Group (NASDAQ:ATSG) has significant debt

Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. 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 Airline Services Group, Inc. (NASDAQ:ATSG) uses debt in its business. But does this debt worry shareholders?

When is debt dangerous?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, many companies use debt to finance their growth, without any negative consequences. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for Air Transport Services Group

How much debt does Air Transport Services Group have?

As you can see below, Air Transport Services Group had US$1.30 billion in debt as of December 2021, up from US$1.49 billion the previous year. However, since he has a cash reserve of $69.5 million, his net debt is less, at around $1.23 billion.

NasdaqGS: ATSG Debt to Equity History March 3, 2022

How strong is Air Transport Services Group’s balance sheet?

The latest balance sheet data shows that Air Transport Services Group had liabilities of $312.6 million due within the year, and liabilities of $1.63 billion due thereafter. In return, he had $69.5 million in cash and $205.4 million in receivables due within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables by $1.67 billion.

This is a mountain of leverage compared to its market capitalization of US$2.36 billion. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet quickly.

In order to assess a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, taxes, depreciation and amortization (EBITDA) and its earnings before interest and taxes (EBIT) divided by its expenses. interest (its interest coverage). Thus, we consider debt to earnings with and without amortization and depreciation expense.

Air Transport Services Group’s net debt is at a very reasonable 2.3 times its EBITDA, while its EBIT covered its interest charges at just 3.5 times last year. This is largely due to the company’s large amortization charges, which no doubt means that its EBITDA is a very generous measure of earnings, and that its debt may be heavier than it first appears. on board. We have seen Air Transport Services Group increase its EBIT by 8.1% over the last twelve months. It’s far from amazing, but it’s a good thing when it comes to paying down debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Air Transport Services Group’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.

Finally, a company can only repay its debts with cold hard cash, not with book profits. So the logical step is to look at what proportion of that EBIT is actual free cash flow. Over the past three years, Air Transport Services Group has recorded free cash flow of 3.9% of its EBIT, which is really quite low. For us, such a low cash conversion creates a bit of paranoia about the ability to extinguish the debt.

Our point of view

To be frank, Air Transport Services Group’s interest coverage and history of converting EBIT to free cash flow makes us rather uncomfortable with its level of leverage. But at least it’s decent enough to increase its EBIT; it’s encouraging. Once we consider all of the above factors together, it seems to us that Air Transport Services Group’s debt makes it a bit risky. Some people like that kind of risk, but we’re aware of the potential pitfalls, so we’d probably prefer it to take on less debt. 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. These risks can be difficult to spot. Every business has them, and we’ve spotted 5 warning signs for Air Transport Services Group (1 of which makes us a little uncomfortable!) that you should know.

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.

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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