Is Webjet (ASX:WEB) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Webjet Limited (ASX:WEB) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Webjet

What Is Webjet's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Webjet had AU$257.1m of debt, an increase on AU$199.5m, over one year. But it also has AU$262.0m in cash to offset that, meaning it has AU$4.90m net cash.

How Strong Is Webjet's Balance Sheet?

We can see from the most recent balance sheet that Webjet had liabilities of AU$395.0m falling due within a year, and liabilities of AU$177.9m due beyond that. Offsetting these obligations, it had cash of AU$262.0m as well as receivables valued at AU$25.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$285.0m.

Given Webjet has a market capitalization of AU$1.87b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Webjet also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Webjet 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, Webjet made a loss at the EBIT level, and saw its revenue drop to AU$52m, which is a fall of 85%. To be frank that doesn't bode well.

So How Risky Is Webjet?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Webjet had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$62m of cash and made a loss of AU$209m. Given it only has net cash of AU$4.90m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Webjet .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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