Stock Analysis

Is easyJet (LON:EZJ) Weighed On By Its Debt Load?

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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. We note that easyJet plc (LON:EZJ) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

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What Is easyJet's Net Debt?

The image below, which you can click on for greater detail, shows that easyJet had debt of UK£3.08b at the end of March 2022, a reduction from UK£3.32b over a year. But it also has UK£3.51b in cash to offset that, meaning it has UK£421.0m net cash.

LSE:EZJ Debt to Equity History September 22nd 2022

How Healthy Is easyJet's Balance Sheet?

We can see from the most recent balance sheet that easyJet had liabilities of UK£3.99b falling due within a year, and liabilities of UK£3.91b due beyond that. Offsetting these obligations, it had cash of UK£3.51b as well as receivables valued at UK£336.0m due within 12 months. So its liabilities total UK£4.05b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the UK£2.58b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, easyJet would probably need a major re-capitalization if its creditors were to demand repayment. Given that easyJet has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine easyJet'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.

Over 12 months, easyJet reported revenue of UK£2.7b, which is a gain of 213%, although it did not report any earnings before interest and tax. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is easyJet?

While easyJet lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow UK£279m. 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. One positive was the revenue growth of 213% over the last year. But the stock still looks risky to us. When I consider a company to be a bit risky, I think it is responsible to check out whether insiders have been reporting any share sales. Luckily, you can click here ito see our graphic depicting easyJet insider transactions.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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