Does Jatcorp (ASX:JAT) Have A Healthy Balance Sheet?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Jatcorp Limited (ASX:JAT) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jatcorp

What Is Jatcorp's Debt?

You can click the graphic below for the historical numbers, but it shows that Jatcorp had AU$4.10m of debt in December 2022, down from AU$8.19m, one year before. However, its balance sheet shows it holds AU$5.84m in cash, so it actually has AU$1.74m net cash.

A Look At Jatcorp's Liabilities

We can see from the most recent balance sheet that Jatcorp had liabilities of AU$6.04m falling due within a year, and liabilities of AU$5.13m due beyond that. On the other hand, it had cash of AU$5.84m and AU$2.40m worth of receivables due within a year. So it has liabilities totalling AU$2.94m more than its cash and near-term receivables, combined.

Given Jatcorp has a market capitalization of AU$25.0m, 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. While it does have liabilities worth noting, Jatcorp also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Jatcorp's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Jatcorp reported revenue of AU$38m, which is a gain of 60%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is Jatcorp?

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 Jatcorp had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through AU$4.4m of cash and made a loss of AU$6.1m. With only AU$1.74m on the balance sheet, it would appear that its going to need to raise capital again soon. Jatcorp's revenue growth shone bright over the last year, so it may well be in a position to turn a profit in due course. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Jatcorp (1 is a bit concerning!) that you should be aware of before investing here.

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.

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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.