December 4, 2021

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Remarkable business & finance

Does Delta Air Lines (NYSE:DAL) Have A Healthy Balance Sheet?

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.’ It’s only natural to consider a company’s balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Delta Air Lines, Inc. (NYSE:DAL) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.

How Much Debt Does Delta Air Lines Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 Delta Air Lines had US$28.4b of debt, an increase on US$24.3b, over one year. However, it does have US$15.2b in cash offsetting this, leading to net debt of about US$13.1b.

NYSE:DAL Debt to Equity History September 13th 2021

How Strong Is Delta Air Lines’ Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Delta Air Lines had liabilities of US$23.6b due within 12 months and liabilities of US$50.5b due beyond that. On the other hand, it had cash of US$15.2b and US$2.26b worth of receivables due within a year. So it has liabilities totalling US$56.5b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the US$25.1b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Delta Air Lines would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Delta Air Lines can strengthen its balance sheet over time. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Delta Air Lines made a loss at the EBIT level, and saw its revenue drop to US$18b, which is a fall of 46%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Delta Air Lines’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$8.4b at the EBIT level. When we look at that alongside the significant liabilities, we’re not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of US$3.2b over the last twelve months. That means it’s on the risky side of things. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example – Delta Air Lines has 1 warning sign we think you should be aware of.

Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

https://www.nasdaq.com/articles/does-delta-air-lines-nyse%3Adal-have-a-healthy-balance-sheet-2021-09-13