Is Jetpak Top Holding (STO:JETPAK) Using Too Much Debt?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Jetpak Top Holding AB (publ) (STO:JETPAK) does carry 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 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Jetpak Top Holding

What Is Jetpak Top Holding's Debt?

As you can see below, Jetpak Top Holding had kr115.0m of debt at March 2023, down from kr159.4m a year prior. However, its balance sheet shows it holds kr153.1m in cash, so it actually has kr38.1m net cash.

A Look At Jetpak Top Holding's Liabilities

The latest balance sheet data shows that Jetpak Top Holding had liabilities of kr214.4m due within a year, and liabilities of kr228.9m falling due after that. On the other hand, it had cash of kr153.1m and kr182.7m worth of receivables due within a year. So its liabilities total kr107.5m more than the combination of its cash and short-term receivables.

Given Jetpak Top Holding has a market capitalization of kr1.10b, 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. While it does have liabilities worth noting, Jetpak Top Holding also has more cash than debt, so we're pretty confident it can manage its debt safely.

Also good is that Jetpak Top Holding grew its EBIT at 10% over the last year, further increasing its ability to manage debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Jetpak Top Holding can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jetpak Top Holding 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 three years, Jetpak Top Holding recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Jetpak Top Holding has kr38.1m in net cash. The cherry on top was that in converted 86% of that EBIT to free cash flow, bringing in kr102m. So we don't think Jetpak Top Holding's use of debt is risky. Another factor that would give us confidence in Jetpak Top Holding would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.