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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Webjet Limited (ASX:WEB) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Webjet

How Much Debt Does Webjet Carry?

As you can see below, Webjet had AU$228.4m of debt at September 2022, down from AU$308.2m a year prior. But on the other hand it also has AU$503.9m in cash, leading to a AU$275.5m net cash position.

A Look At Webjet's Liabilities

The latest balance sheet data shows that Webjet had liabilities of AU$553.2m due within a year, and liabilities of AU$247.9m falling due after that. On the other hand, it had cash of AU$503.9m and AU$203.3m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$93.9m.

Of course, Webjet has a market capitalization of AU$2.46b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Webjet boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Webjet's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Webjet wasn't profitable at an EBIT level, but managed to grow its revenue by 172%, to AU$259m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Webjet?

While Webjet lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow AU$181m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for Webjet shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Webjet is showing 1 warning sign in our investment analysis , you should know about...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.