David Iben put it well when he said, âVolatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It’s only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Like many other companies Jet Freight Logistics Limited (NSE: JETFREIGHT) uses debt. But does this debt worry shareholders?
Why Does Debt Bring Risk?
Debts and other liabilities become risky for a business when it cannot easily meet these obligations, either with free cash flow or by raising capital at an attractive price. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. While it’s not too common, we often see indebted companies continually diluting their shareholders because lenders are forcing them to raise capital at a ridiculous price. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.
Check out our latest review for Jet Freight Logistics
What is Jet Freight Logistics’ net debt?
The image below, which you can click for more details, shows that in September 2021, Jet Freight Logistics had a debt of 376.2 million yen, up from 334.7 million yen in a year. However, it has â¬ 30.6 million in cash offsetting this, leading to net debt of around â¬ 345.6 million.
A look at the responsibilities of Jet Freight Logistics
The latest balance sheet data shows that Jet Freight Logistics had liabilities of 668.6 million yen due within one year, and liabilities of 131.5 million yen due after that. In return, he had 30.6 million yen in cash and 609.9 million yen in receivables due within 12 months. It therefore has liabilities totaling 159.6 million yen more than its combined cash and short-term receivables.
This deficit is not that serious because Jet Freight Logistics is worth 483.8 M, and could therefore probably raise enough capital to consolidate its balance sheet, if the need arises. However, it is always worth taking a close look at your ability to repay your debt.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). In this way, we consider both the absolute amount of debt, as well as the interest rates paid on it.
Jet Freight Logistics has a debt to EBITDA ratio of 3.3 and its EBIT covered interest expense 2.8 times. This suggests that while debt levels are significant, we would stop calling them problematic. However, the bright side is that Jet Freight Logistics achieved a positive EBIT of 91 million euros in the last twelve months, an improvement over the loss of the previous year. When analyzing debt levels, the balance sheet is the obvious starting point. But you can’t look at debt in isolation; since Jet Freight Logistics will need income to repay this debt. So if you want to know more about its profits, it might be worth checking out this long term profit trend chart.
Finally, a business can only repay its debts with hard cash, not with book profits. It is therefore important to check to what extent its earnings before interest and taxes (EBIT) are converted into actual free cash flow. Over the past year, Jet Freight Logistics has reported free cash flow of 15% of its EBIT, which is really quite low. This low level of cash conversion undermines its ability to manage and repay its debts.
Our point of view
While the conversion of Jet Freight Logistics’ EBIT to free cash flow makes us cautious about this, its track record of hedging its interest charges with its EBIT is no better. But it’s not so bad to (not) increase your EBIT. Taking the above factors together, we believe that Jet Freight Logistics’ debt presents certain risks to the business. While this debt may increase returns, we believe the company now has sufficient leverage. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 5 warning signs for Jet Freight Logistics (3 of which cannot be ignored!) that you should know.
At the end of the day, it’s often best to focus on businesses that don’t have net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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