Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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 assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Jet2
How Much Debt Does Jet2 Carry?
As you can see below, Jet2 had UK£472.1m of debt at September 2020, down from UK£981.3m a year prior. But it also has UK£1.01b in cash to offset that, meaning it has UK£536.1m net cash.
How Healthy Is Jet2's Balance Sheet?
We can see from the most recent balance sheet that Jet2 had liabilities of UK£830.6m falling due within a year, and liabilities of UK£1.06b due beyond that. Offsetting this, it had UK£1.01b in cash and UK£159.5m in receivables that were due within 12 months. So it has liabilities totalling UK£719.4m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Jet2 has a market capitalization of UK£2.52b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Jet2 boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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 58%, to UK£1.4b. 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. Indeed, in that time it burnt through UK£825m of cash and made a loss of UK£262m. With only UK£536.1m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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 Jet2 is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
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This article by Simply Wall St is general in nature. 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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About AIM:JET2
Jet2
Engages in the leisure travel business primarily in the United Kingdom.
Very undervalued with flawless balance sheet.
