Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Jet2 plc (LON:JET2) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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. 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. 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.
See our latest analysis for Jet2
What Is Jet2's Debt?
The image below, which you can click on for greater detail, shows that at March 2022 Jet2 had debt of UK£991.7m, up from UK£756.2m in one year. However, it does have UK£2.23b in cash offsetting this, leading to net cash of UK£1.24b.
A Look At Jet2's Liabilities
According to the last reported balance sheet, Jet2 had liabilities of UK£1.68b due within 12 months, and liabilities of UK£1.42b due beyond 12 months. On the other hand, it had cash of UK£2.23b and UK£91.1m worth of receivables due within a year. So it has liabilities totalling UK£777.3m more than its cash and near-term receivables, combined.
This deficit isn't so bad because Jet2 is worth UK£2.11b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.
Over 12 months, Jet2 reported revenue of UK£1.2b, which is a gain of 212%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!
So How Risky Is Jet2?
Although Jet2 had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£643m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The good news for Jet2 shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. For riskier companies like Jet2 I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
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.
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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.
About AIM:JET2
Jet2
Engages in the leisure travel business primarily in the United Kingdom.
Very undervalued with flawless balance sheet.