Would Jungfraubahn Holding (VTX:JFN) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Jungfraubahn Holding AG (VTX:JFN) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for Jungfraubahn Holding

What Is Jungfraubahn Holding's Debt?

As you can see below, at the end of December 2021, Jungfraubahn Holding had CHF135.0m of debt, up from CHF109.3m a year ago. Click the image for more detail. However, it also had CHF17.8m in cash, and so its net debt is CHF117.3m.

How Strong Is Jungfraubahn Holding's Balance Sheet?

We can see from the most recent balance sheet that Jungfraubahn Holding had liabilities of CHF95.8m falling due within a year, and liabilities of CHF126.5m due beyond that. Offsetting these obligations, it had cash of CHF17.8m as well as receivables valued at CHF19.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CHF184.8m.

While this might seem like a lot, it is not so bad since Jungfraubahn Holding has a market capitalization of CHF767.3m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Jungfraubahn Holding'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 Jungfraubahn Holding wasn't profitable at an EBIT level, but managed to grow its revenue by 4.1%, to CHF131m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Jungfraubahn Holding had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CHF11m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CHF25m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. For riskier companies like Jungfraubahn Holding I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.

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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.