3 Reasons AAL is Risky and 1 Stock to Buy Instead

American Airlines trades at $13.01 per share and has stayed right on track with the overall market, gaining 20.4% over the last six months. At the same time, the S&P 500 has returned 17.5%.

Is now the time to buy American Airlines, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it's free.

We're cautious about American Airlines. Here are three reasons you should be careful with AAL, plus one stock we'd rather own.

Revenue growth can be broken down into changes in price and volume (for companies like American Airlines, our preferred volume metric is revenue passenger miles). While both are important, the latter is the most critical to analyze because prices have a ceiling.

American Airlines's revenue passenger miles came in at 68.12 billion in the latest quarter, and over the last two years, averaged 9.5% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

We like to invest in businesses with high returns, but the trend in a company's ROIC can also be an early indicator of future business quality.

Over the last few years, American Airlines's ROIC has unfortunately decreased. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

American Airlines's $35.73 billion of debt exceeds the $7.77 billion of cash on its balance sheet. Furthermore, its 9× net-debt-to-EBITDA ratio (based on its EBITDA of $2.97 billion over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company's rating if profitability falls. American Airlines could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope American Airlines can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

American Airlines falls short of our quality standards. That said, the stock currently trades at 833.1× forward P/E (or $13.01 per share). This valuation multiple is fair, but we don't have much confidence in the company. There are better investments elsewhere. We'd suggest looking at a top digital advertising platform riding the creator economy.

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