Is Spirit AeroSystems Holdings (NYSE:SPR) Weighed On By Its Debt Load?
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 Spirit AeroSystems Holdings, Inc. (NYSE:SPR) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
See our latest analysis for Spirit AeroSystems Holdings
What Is Spirit AeroSystems Holdings’s Net Debt?
As you can see below, at the end of April 2021, Spirit AeroSystems Holdings had US$3.42b of debt, up from US$2.88b a year ago. Click the image for more detail. On the flip side, it has US$1.36b in cash leading to net debt of about US$2.06b.
A Look At Spirit AeroSystems Holdings’ Liabilities
According to the last reported balance sheet, Spirit AeroSystems Holdings had liabilities of US$1.49b due within 12 months, and liabilities of US$5.69b due beyond 12 months. Offsetting this, it had US$1.36b in cash and US$1.20b in receivables that were due within 12 months. So its liabilities total US$4.62b more than the combination of its cash and short-term receivables.
When you consider that this deficiency exceeds the company’s US$4.52b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Spirit AeroSystems Holdings’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year Spirit AeroSystems Holdings had a loss before interest and tax, and actually shrunk its revenue by 54%, to US$3.2b. That makes us nervous, to say the least.
Not only did Spirit AeroSystems Holdings’s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable US$655m at the EBIT level. When we look at that alongside the significant liabilities, we’re not particularly confident about the company. We’d want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through US$699m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We’ve spotted 1 warning sign for Spirit AeroSystems Holdings you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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