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Webjet (ASX:WEB) Has Debt But No Earnings; Should You Worry?

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The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Webjet Limited (ASX:WEB) makes use of debt. But should shareholders be worried about its use of debt?

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. 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, 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.

Check out our latest analysis for Webjet

What Is Webjet's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 Webjet had AU$257.1m of debt, an increase on AU$199.5m, over one year. However, its balance sheet shows it holds AU$262.0m in cash, so it actually has AU$4.90m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

A Look At Webjet's Liabilities

The latest balance sheet data shows that Webjet had liabilities of AU$395.0m due within a year, and liabilities of AU$177.9m falling due after that. Offsetting these obligations, it had cash of AU$262.0m as well as receivables valued at AU$25.9m due within 12 months. So it has liabilities totalling AU$285.0m more than its cash and near-term receivables, combined.

Given Webjet has a market capitalization of AU$2.25b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Webjet boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Webjet 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 Webjet had a loss before interest and tax, and actually shrunk its revenue by 85%, to AU$52m. To be frank that doesn't bode well.

So How Risky Is Webjet?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Webjet had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of AU$62m and booked a AU$209m accounting loss. With only AU$4.90m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Webjet that you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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