Some comfort for those who have not yet assessed WEB's balance sheet: I am very confident Webjet comes out of this stronger. There is a likihood of further downside yes but it will be short lived as the true over statement of how bad the virus is becomes known and normal life returns when the virus is discovered in every country and travel bans are no longer effective. Containment will move to curtailment meaning quarantines for travellers from high risk areas, working from home and bans on large gatherings. The world will continue plodding along like it always has:
How Strong Is Webjet’s Balance Sheet?
We can see from the most recent balance sheet that Webjet had liabilities of AU$551.0m falling due within a year, and liabilities of AU$245.1m due beyond that. On the other hand, it had cash of AU$157.2m and AU$299.0m worth of receivables due within a year. So it has liabilities totalling AU$339.9m more than its cash and near-term receivables, combined.Webjet has a market capitalization of AU$1.30b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it’s clear that we should definitely closely examine whether it can manage its debt without dilution.In order to size up a company’s debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.Webjet’s net debt is only 0.24 times its EBITDA. And its EBIT covers its interest expense a whopping 10.6 times over. So we’re pretty relaxed about its super-conservative use of debt. On top of that, Webjet grew its EBIT by 31% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Webjet’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.Finally, a business needs free cash flow to pay off debt; accounting profits just don’t cut it. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last three years, Webjet produced sturdy free cash flow equating to 53% of its EBIT, about what we’d expect. This cold hard cash means it can reduce its debt when it wants to.
Our View
Happily, Webjet’s impressive EBIT growth rate implies it has the upper hand on its debt. And that’s just the beginning of the good news since its net debt to EBITDA is also very heartening. Looking at the bigger picture, we think Webjet’s use of debt seems quite reasonable and we’re not concerned about it. After all, sensible leverage can boost returns on equity. 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.
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