Is Jumia Technologies (NYSE:JMIA) Using Too Much Debt?

Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Jumia Technologies AG (NYSE:JMIA) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can’t easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Jumia Technologies

What Is Jumia Technologies’s Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2019 Jumia Technologies had €10.1m of debt, an increase on €2.24m, over one year. However, it does have €333.0m in cash offsetting this, leading to net cash of €322.9m.

NYSE:JMIA Historical Debt, November 4th 2019
NYSE:JMIA Historical Debt, November 4th 2019

How Strong Is Jumia Technologies’s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jumia Technologies had liabilities of €111.6m due within 12 months and liabilities of €6.55m due beyond that. Offsetting this, it had €333.0m in cash and €26.2m in receivables that were due within 12 months. So it actually has €241.1m more liquid assets than total liabilities.

This surplus strongly suggests that Jumia Technologies has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, it seems its balance sheet is as strong as a black-belt karate master. Simply put, the fact that Jumia Technologies has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Jumia Technologies’s ability to maintain a healthy balance sheet going forward. So if you’re focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Jumia Technologies reported revenue of €149m, which is a gain of 32%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Jumia Technologies?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Jumia Technologies had negative earnings before interest and tax (EBIT), over the last year. Indeed, in that time it burnt through €165m of cash and made a loss of €208m. However, it has net cash of €322.9m, so it has a bit of time before it will need more capital. With very solid revenue growth in the last year, Jumia Technologies may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. For riskier companies like Jumia Technologies I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.