Bombardier (TSX: BBD.B) stock is not as cheap as it once was. At Friday’s close, it traded for $68.50, which is much higher than its price at its all-time lows. If you last checked in on BBD.B stock two years ago, you might think that the company has turned things around in a big way. At one point, it was trading for under a dollar! However, it’s not exactly the case that Bombardier has staged a miraculous recovery. What actually happened was that the company did a 25-for-1 stock split, which reduced the number of shares and made each share more valuable. Reverse stock splits don’t necessarily make investors’ positions more valuable, though BBD.B did rally 829% from its 2020 lows.
The question investors need to ask is: Is this stock worth a look now? Bombardier has staged an impressive rally, but that’s to be expected of an aircraft manufacturer in the post-2020 period. At the height of the COVID-19 pandemic, airline stocks were priced like they were going out of business, as were aircraft manufacturers like BBD.B. A rally from such extremely pessimistic levels was inevitable.
But today’s investors need to remember that there was a time when Bombardier looked like it was about to go out of business. The company spent much of the last decade selling off business units while losing money, leading some to think that it would go bankrupt once selling businesses to cover expenses was no longer feasible. In this article, I will explore the possibility of Bombardier going bankrupt, drawing on the company’s earnings and balance sheet as the main sources of information.
Bombardier’s earnings trend
In its most recent quarter, Bombardier delivered:
- $2.7 billion in revenues, up 50%.
- $352 million in adjusted EBITDA (a tax- and interest-free earnings metric), up 51%.
- $211 million in EBIT, up 86%.
- $169 million in free cash flow (“FCF”), down approximately 50%.
The decline in free cash flow might look like a big negative, but FCF actually increased 700% on a full-year basis, so on a longer-term basis, the FCF situation looks good.
Bombardier’s balance sheet
Now, onto the biggest factor in bankruptcy risk: the balance sheet.
At the end of 2022, Bombardier’s balance sheet metrics boasted $16.6 billion in total assets (including $1.7 billion in cash), $20.4 billion in total liabilities (including $6 billion in debt and $4.2 billion in net debt), and $-4.2 billion in shareholder’s equity.
Unfortunately, the picture here is not as good as the earnings picture. BBD.B has negative equity, meaning it has more debt than assets. That is a classic sign of bankruptcy risk. The current ratio (current assets of $7.5 billion divided by current liabilities of $7.3 billion), which measures liquidity over the next 12 months, is slightly above one – that’s good, but not amazing. Overall, Bombardier has a poor quality balance sheet.
Foolish takeaway
The bottom line on Bombardier is that there is some bankruptcy risk here, but not an immediate one. A company having negative equity is a bad thing. It implies that shareholders wouldn’t get anything in the event of bankruptcy. It also increases the risk of bankruptcy, because it implies a large debt load. This isn’t to say that Bombardier will go bankrupt soon. But over a long period of time, such an outcome is a possibility.
