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

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Jetbest Corporation (GTSM:4741) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jetbest

How Much Debt Does Jetbest Carry?

You can click the graphic below for the historical numbers, but it shows that Jetbest had NT$98.1m of debt in September 2020, down from NT$125.5m, one year before. But it also has NT$235.5m in cash to offset that, meaning it has NT$137.4m net cash.

A Look At Jetbest's Liabilities

According to the last reported balance sheet, Jetbest had liabilities of NT$190.6m due within 12 months, and liabilities of NT$33.5m due beyond 12 months. Offsetting this, it had NT$235.5m in cash and NT$111.2m in receivables that were 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.

The modesty of its debt load may become crucial for Jetbest if management cannot prevent a repeat of the 66% cut to EBIT over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jetbest's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Jetbest 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 three years, Jetbest 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 it is always sensible to investigate a company's debt, in this case Jetbest has NT$137.4m in net cash and a decent-looking balance sheet. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 4 warning signs for Jetbest (of which 1 is significant!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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.
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