Jetbest (GTSM:4741) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, '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. We note that Jetbest Corporation (GTSM:4741) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 Jetbest

How Much Debt Does Jetbest Carry?

As you can see below, Jetbest had NT$98.1m of debt at September 2020, down from NT$125.5m a year prior. However, its balance sheet shows it holds NT$235.5m in cash, so it actually has NT$137.4m net cash.

How Strong Is Jetbest's Balance Sheet?

The latest balance sheet data shows that Jetbest had liabilities of NT$190.6m due within a year, and liabilities of NT$33.5m falling due after that. Offsetting these obligations, it had cash of NT$235.5m as well as receivables valued at NT$111.2m due within 12 months. So it can boast NT$122.6m more liquid assets than total liabilities.

This surplus suggests that Jetbest has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jetbest has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Jetbest's saving grace is its low debt levels, because its EBIT has tanked 66% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Jetbest will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Jetbest 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. Happily for any shareholders, Jetbest actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Jetbest has net cash of NT$137.4m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of NT$98m, being 148% of its EBIT. So we don't have any problem with Jetbest's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Jetbest you should be aware of, and 1 of them is potentially serious.

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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