Is Jet2 (LON:JET2) weighed down by its debt?

Warren Buffett said: “Volatility is far from synonymous with risk. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Above all, Jet2 plc (LON:JET2) is in debt. But does this debt worry shareholders?

When is debt a problem?

Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. Ultimately, if the company cannot meet its legal debt repayment obligations, shareholders could walk away with nothing. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, especially capital-intensive 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 a debt of £991.7m, up from £756.2m a year ago. Click on the image for more details. However, his balance sheet shows he is holding £2.23bn in cash, so he actually has £1.24bn in 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 £1.68bn due within 12 months and liabilities of £1.42bn due beyond. On the other hand, it had cash of £2.23 billion and £185.8 million of receivables due within a year. It therefore has liabilities totaling £682.6 million more than its cash and short-term receivables, combined.

Jet2 has a market capitalization of £1.96 billion, so it could very likely raise funds to improve its balance sheet, should the need arise. However, it is always worth taking a close look at its ability to repay debt. While it has liabilities worth noting, Jet2 also has more cash than debt, so we’re pretty confident it can manage its debt safely. When analyzing debt levels, the balance sheet is the obvious starting point. But ultimately, the company’s future profitability will decide whether Jet2 can strengthen its balance sheet over time. So if you are focused on the future, you can check out this free report showing analyst earnings forecasts.

Last year, Jet2 was not profitable on an EBIT level, but managed to increase its turnover by 212%, to £1.2 billion. That’s practically the hole-in-one of revenue growth!

So how risky is Jet2?

Although Jet2 posted a loss in earnings before interest and tax (EBIT) over the last twelve months, it generated a positive free cash flow of £643 million. So taking that at face value and given the net cash position, we don’t think the stock is too risky in the near term. A bright spot is that Jet2 is growing revenue quickly, making it easy to sell a growth story and raise capital if needed. But that doesn’t change our view 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.

In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.

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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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