Is Webjet (ASX:WEB) Using Debt Sensibly?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that Webjet Limited (ASX:WEB) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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, at the end of March 2022, Webjet had AU$308.2m of debt, up from AU$257.1m a year ago. Click the image for more detail. But it also has AU$433.7m in cash to offset that, meaning it has AU$125.5m net cash.

How Strong Is Webjet's Balance Sheet?

We can see from the most recent balance sheet that Webjet had liabilities of AU$335.6m falling due within a year, and liabilities of AU$337.4m due beyond that. Offsetting these obligations, it had cash of AU$433.7m as well as receivables valued at AU$99.8m due within 12 months. So it has liabilities totalling AU$139.5m more than its cash and near-term receivables, combined.

Given Webjet has a market capitalization of AU$2.28b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Webjet can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Webjet reported revenue of AU$139m, which is a gain of 169%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is Webjet?

Although Webjet had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of AU$50m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that Webjet is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting Webjet insider transactions.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.