Jayex Healthcare (ASX:JHL) Is Making Moderate Use Of Debt

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. As with many other companies Jayex Healthcare Limited (ASX:JHL) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Jayex Healthcare

What Is Jayex Healthcare's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 Jayex Healthcare had AU$4.68m of debt, an increase on AU$4.34m, over one year. However, it does have AU$1.18m in cash offsetting this, leading to net debt of about AU$3.50m.

How Strong Is Jayex Healthcare's Balance Sheet?

The latest balance sheet data shows that Jayex Healthcare had liabilities of AU$6.76m due within a year, and liabilities of AU$2.22m falling due after that. Offsetting these obligations, it had cash of AU$1.18m as well as receivables valued at AU$1.17m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$6.63m.

This deficit is considerable relative to its market capitalization of AU$9.67m, so it does suggest shareholders should keep an eye on Jayex Healthcare's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Jayex Healthcare will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Jayex Healthcare made a loss at the EBIT level, and saw its revenue drop to AU$6.6m, which is a fall of 8.1%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Jayex Healthcare produced an earnings before interest and tax (EBIT) loss. Indeed, it lost AU$913k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled AU$454k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Jayex Healthcare (1 is a bit unpleasant) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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. 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.
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