Is Webjet (ASX:WEB) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Webjet Limited (ASX:WEB) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Webjet

What Is Webjet's Debt?

The image below, which you can click on for greater detail, shows that Webjet had debt of AU$224.3m at the end of March 2024, a reduction from AU$235.5m over a year. However, its balance sheet shows it holds AU$673.4m in cash, so it actually has AU$449.1m net cash.

How Healthy Is Webjet's Balance Sheet?

We can see from the most recent balance sheet that Webjet had liabilities of AU$597.2m falling due within a year, and liabilities of AU$262.3m due beyond that. Offsetting this, it had AU$673.4m in cash and AU$240.6m in receivables that were due within 12 months. So it can boast AU$54.5m more liquid assets than total liabilities.

Having regard to Webjet's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the AU$3.46b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, Webjet boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Webjet grew its EBIT by 126% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Webjet has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Webjet actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case Webjet has AU$449.1m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of AU$142m, being 144% of its EBIT. So is Webjet's debt a risk? It doesn't seem so to us. We'd be very excited to see if Webjet insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.