Yahoo Finance Is Jet2 (LON:JET2) Weighed On By Its Debt Load?
Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Jet2 plc (LON:JET2) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Jet2
What Is Jet2's Net Debt?
As you can see below, at the end of March 2022, Jet2 had UK£991.7m of debt, up from UK£756.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds UK£2.23b in cash, so it actually has UK£1.24b net cash.
How Healthy Is Jet2's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Jet2 had liabilities of UK£1.68b due within 12 months and liabilities of UK£1.42b due beyond that. On the other hand, it had cash of UK£2.23b and UK£185.8m worth of receivables due within a year. So it has liabilities totalling UK£682.6m more than its cash and near-term receivables, combined.
Jet2 has a market capitalization of UK£1.96b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Jet2 also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Jet2 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.
In the last year Jet2 wasn't profitable at an EBIT level, but managed to grow its revenue by 212%, to UK£1.2b. That's virtually the hole-in-one of revenue growth!
So How Risky Is Jet2?
Although Jet2 had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of UK£643m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. One positive is that Jet2 is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But that doesn't change our opinion that the stock is risky. For riskier companies like Jet2 I always like to keep an eye on whether insiders are buying or selling. So click here if you want to find out for yourself.
At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.
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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.
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