We Think Jungfraubahn Holding (VTX:JFN) Is Taking Some Risk With Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Jungfraubahn Holding AG (VTX:JFN) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 Jungfraubahn Holding

What Is Jungfraubahn Holding's Debt?

The image below, which you can click on for greater detail, shows that at June 2020 Jungfraubahn Holding had debt of CHF68.5m, up from CHF41.5m in one year. However, it does have CHF21.3m in cash offsetting this, leading to net debt of about CHF47.2m.

How Healthy Is Jungfraubahn Holding's Balance Sheet?

According to the last reported balance sheet, Jungfraubahn Holding had liabilities of CHF61.4m due within 12 months, and liabilities of CHF98.9m due beyond 12 months. On the other hand, it had cash of CHF21.3m and CHF20.6m worth of receivables due within a year. So its liabilities total CHF118.4m more than the combination of its cash and short-term receivables.

Given Jungfraubahn Holding has a market capitalization of CHF802.7m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Jungfraubahn Holding has a low net debt to EBITDA ratio of only 0.80. And its EBIT covers its interest expense a whopping 77.3 times over. So we're pretty relaxed about its super-conservative use of debt. The modesty of its debt load may become crucial for Jungfraubahn Holding if management cannot prevent a repeat of the 61% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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 Jungfraubahn Holding 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Over the last three years, Jungfraubahn Holding recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Our View

Neither Jungfraubahn Holding's ability to grow its EBIT nor its conversion of EBIT to free cash flow gave us confidence in its ability to take on more debt. But its interest cover tells a very different story, and suggests some resilience. When we consider all the factors discussed, it seems to us that Jungfraubahn Holding is taking some risks with its use of debt. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Jungfraubahn Holding is showing 2 warning signs 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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