These 4 Measures Indicate That Jet2 (LON:JET2) Is Using Debt Reasonably Well

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Jet2 plc (LON:JET2) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jet2

How Much Debt Does Jet2 Carry?

The image below, which you can click on for greater detail, shows that Jet2 had debt of UK£932.2m at the end of September 2022, a reduction from UK£1.21b over a year. However, its balance sheet shows it holds UK£2.83b in cash, so it actually has UK£1.90b net cash.

How Healthy Is Jet2's Balance Sheet?

According to the last reported balance sheet, Jet2 had liabilities of UK£2.02b due within 12 months, and liabilities of UK£1.39b due beyond 12 months. Offsetting these obligations, it had cash of UK£2.83b as well as receivables valued at UK£180.8m due within 12 months. So its liabilities total UK£392.1m more than the combination of its cash and short-term receivables.

Given Jet2 has a market capitalization of UK£2.13b, 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!

It was also good to see that despite losing money on the EBIT line last year, Jet2 turned things around in the last 12 months, delivering and EBIT of UK£363m. 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 year, 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

Although Jet2's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£1.90b. The cherry on top was that in converted 324% of that EBIT to free cash flow, bringing in UK£1.2b. So is Jet2's debt a risk? It doesn't seem so to us. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Jet2 you should know about.

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.