Jet2 (LON:JET2) Seems To Use Debt Rather Sparingly

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 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. Importantly, Jet2 plc (LON:JET2) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt 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 Jet2 had UK£700.6m of debt in September 2024, down from UK£760.9m, one year before. But it also has UK£3.60b in cash to offset that, meaning it has UK£2.90b net cash.

How Healthy Is Jet2's Balance Sheet?

We can see from the most recent balance sheet that Jet2 had liabilities of UK£2.70b falling due within a year, and liabilities of UK£1.44b due beyond that. On the other hand, it had cash of UK£3.60b and UK£253.3m worth of receivables due within a year. So it has liabilities totalling UK£288.2m more than its cash and near-term receivables, combined.

Given Jet2 has a market capitalization of UK£3.32b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Jet2 boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Jet2 grew its EBIT by 3.7% in the last year, making that debt load look even more manageable. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Jet2 has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Jet2 actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Jet2's liabilities, but we can be reassured by the fact it has has net cash of UK£2.90b. The cherry on top was that in converted 187% of that EBIT to free cash flow, bringing in UK£729m. So is Jet2's debt a risk? It doesn't seem so to us. We'd be very excited to see if Jet2 insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.