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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Jet2 plc (LON:JET2) does use debt in its business. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jet2

What Is Jet2's Net Debt?

As you can see below, at the end of September 2021, Jet2 had UK£1.21b of debt, up from UK£472.1m a year ago. Click the image for more detail. But on the other hand it also has UK£2.04b in cash, leading to a UK£823.0m net cash position.

A Look At Jet2's Liabilities

We can see from the most recent balance sheet that Jet2 had liabilities of UK£1.26b falling due within a year, and liabilities of UK£1.40b due beyond that. Offsetting this, it had UK£2.04b in cash and UK£124.2m in receivables that were due within 12 months. So its liabilities total UK£490.8m more than the combination of its cash and short-term receivables.

Since publicly traded Jet2 shares are worth a total of UK£2.80b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Jet2 also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jet2 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.

In the last year Jet2 had a loss before interest and tax, and actually shrunk its revenue by 61%, to UK£525m. 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 the fact is that over the last twelve months Jet2 lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of UK£95m and booked a UK£366m accounting loss. Given it only has net cash of UK£823.0m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Jet2 that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.