Webjet (ASX:WEB) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Webjet

What Is Webjet's Debt?

As you can see below, Webjet had AU$224.3m of debt at March 2024, down from AU$235.5m a year prior. But on the other hand it also has AU$673.4m in cash, leading to a AU$449.1m net cash position.

A Look At Webjet's Liabilities

Zooming in on the latest balance sheet data, we can see that Webjet had liabilities of AU$597.2m due within 12 months and liabilities of AU$262.3m due beyond that. Offsetting these obligations, it had cash of AU$673.4m as well as receivables valued at AU$240.6m due within 12 months. So it can boast AU$54.5m more liquid assets than total liabilities.

This state of affairs indicates that Webjet's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the AU$3.01b company is short on cash, but still worth keeping an eye on the 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. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Webjet may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Webjet actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Webjet has net cash of AU$449.1m, as well as more liquid assets than liabilities. The cherry on top was that in converted 144% of that EBIT to free cash flow, bringing in AU$142m. So we don't think Webjet's use of debt is risky. 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.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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.