These 4 Measures Indicate That easyJet (LON:EZJ) Is Using Debt Reasonably Well

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.' 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. As with many other companies easyJet plc (LON:EZJ) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for easyJet

What Is easyJet's Debt?

You can click the graphic below for the historical numbers, but it shows that easyJet had UK£1.92b of debt in September 2023, down from UK£3.20b, one year before. But it also has UK£2.93b in cash to offset that, meaning it has UK£1.01b net cash.

How Strong Is easyJet's Balance Sheet?

We can see from the most recent balance sheet that easyJet had liabilities of UK£4.14b falling due within a year, and liabilities of UK£2.91b due beyond that. On the other hand, it had cash of UK£2.93b and UK£299.0m worth of receivables due within a year. So it has liabilities totalling UK£3.83b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of UK£3.73b, we think shareholders really should watch easyJet's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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.

Better yet, easyJet grew its EBIT by 46,700% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. easyJet may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, easyJet actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While easyJet does have more liabilities than liquid assets, it also has net cash of UK£1.01b. The cherry on top was that in converted 222% of that EBIT to free cash flow, bringing in UK£797m. So we are not troubled with easyJet's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that easyJet insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.