David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.’ When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Mesa Air Group, Inc. (NASDAQ:MESA) does carry debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
How Much Debt Does Mesa Air Group Carry?
As you can see below, Mesa Air Group had US$617.5m of debt at June 2022, down from US$688.4m a year prior. However, it also had US$54.4m in cash, and so its net debt is US$563.1m.
How Strong Is Mesa Air Group’s Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Mesa Air Group had liabilities of US$240.3m due within 12 months and liabilities of US$656.9m due beyond that. Offsetting these obligations, it had cash of US$54.4m as well as receivables valued at US$4.05m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$838.7m.
This deficit casts a shadow over the US$65.3m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Mesa Air Group would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Mesa Air Group’s ability to maintain a healthy balance sheet going forward.
Over 12 months, Mesa Air Group reported revenue of US$536m, which is a gain of 12%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Over the last twelve months Mesa Air Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable US$30m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we’re sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it burned through US$24m in the last year. So is this a high risk stock? We think so, and we’d avoid it. When analysing debt levels, the balance sheet is the obvious place to start.