Down 44% this year, budget airline Wizz Air‘s (LSE: WIZZ) one of the worst-performing stocks on the FTSE 250.

To some investors, a collapsing price is a sign to stay away. To others, it’s an opportunity to grab some cheap shares. In either case, both sides could be wrong or right. It depends on why the stock’s crashing and whether it can recover.

Even the best companies experience dips from time to time but in some cases, they never recover. To avoid getting sucked into a value trap, it’s important to gauge the company’s prospects. First, I check if there’s sufficient demand for its product or service. Then I evaluate its ability to outperform rivals. Lastly, I check whether it faces any significant risk from external factors.

Let’s see how Wizz Air measures up.

A recovering industry

The airline operates a budget-friendly, no-frills service model, attracting price-sensitive travellers. This model’s proven popular in recent years and will likely remain in high demand. Before the pandemic, it was rapidly expanding its operations across Europe and beyond. But the year-long travel ban combined with lingering inflation has taken its toll.

After peaking at £55 per share in March 2021, the share price has since collapsed to almost £12. It’s now lower than it’s been in over 10 years. So is a recovery possible for the £1.26bn company? I’m digging into its financials to try and find out.

Valuation and risks

With the share price now so low, Wizz Air’s estimated to be undervalued by almost 92%, based on future cash flow estimates. Still, analysts don’t expect exceptional growth — at least, not in the immediate future. While earnings are forecast to grow 15.6% a year going forward, earnings per share (EPS) are expected to decline to £2.72.

The subdued forecast may be factoring in risks related to the Middle East conflict. Oil prices jumped last week after the situation escalated and many airlines have been forced to cancel flights to the region.

What’s more, it’s in a highly competitive industry. While Wizz Air’s a leading airline in Eastern Europe, it often struggles to match the low prices offered by Ryanair. All these factors put pressure on the company’s operations and could hurt the share price.

Financial position

Despite the problems mentioned above, Wizz Air has a good forward price-to-earnings (P/E) ratio of 5.5. This is lower than key competitors easyJet and Jet2. Analysts forecast an average 12-month price target of £19.20 for the stock, a 57.8% increase. If they’re right, there’s a chance the stock could be a lucrative investment.

But there remains a huge concern for me — the airline’s balance sheet. With a £1.29bn market-cap and £6.27bn in debt, it’s in a very precarious financial position. And its level of interest coverage from operating income is only at 1.3 times, putting it at an increased risk of defaulting.

For me, that makes the stock too risky to invest in right now. However, if earnings improve and it reduces its debt load, I may reconsider.