Health Check: How Prudently Does Jet2 (LON:JET2) Use Debt?

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.' 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. Importantly, Jet2 plc (LON:JET2) does carry debt. But should shareholders be worried about its use of debt?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jet2

What Is Jet2's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Jet2 had UK£756.2m of debt, an increase on UK£485.7m, over one year. But it also has UK£1.38b in cash to offset that, meaning it has UK£622.8m net cash.

How Strong Is Jet2's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jet2 had liabilities of UK£858.2m due within 12 months and liabilities of UK£1.05b due beyond that. Offsetting these obligations, it had cash of UK£1.38b as well as receivables valued at UK£19.6m due within 12 months. So its liabilities total UK£510.2m more than the combination of its cash and short-term receivables.

Of course, Jet2 has a market capitalization of UK£2.80b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Jet2 boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Jet2's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Jet2 had a loss before interest and tax, and actually shrunk its revenue by 89%, to UK£395m. That makes us nervous, to say the least.

So How Risky Is Jet2?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Jet2 had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of UK£871m and booked a UK£300m accounting loss. With only UK£622.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For example Jet2 has 3 warning signs (and 1 which can't be ignored) we think 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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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.
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