Yahoo Finance Is Wizz Air Holdings (LON:WIZZ) A Risky Investment?
The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We note that Wizz Air Holdings Plc (LON:WIZZ) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Wizz Air Holdings
What Is Wizz Air Holdings's Net Debt?
As you can see below, Wizz Air Holdings had €26.8m of debt at March 2019, down from €32.2m a year prior. However, its balance sheet shows it holds €1.32b in cash, so it actually has €1.29b net cash.
How Strong Is Wizz Air Holdings's Balance Sheet?
According to the last reported balance sheet, Wizz Air Holdings had liabilities of €847.3m due within 12 months, and liabilities of €182.5m due beyond 12 months. Offsetting this, it had €1.32b in cash and €130.7m in receivables that were due within 12 months. So it can boast €416.9m more liquid assets than total liabilities.
This surplus suggests that Wizz Air Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Wizz Air Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Fortunately, Wizz Air Holdings grew its EBIT by 3.0% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Wizz Air Holdings'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Wizz Air Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Wizz Air Holdings recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.
Summing up
While it is always sensible to investigate a company's debt, in this case Wizz Air Holdings has €1.3b in net cash and a decent-looking balance sheet. And it also grew its EBIT by 3.0% over the last year. So is Wizz Air Holdings's debt a risk? It doesn't seem so to us. We'd be motivated to research the stock further if we found out that Wizz Air Holdings insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.
