Is Joyce (ASX:JYC) Using Too Much Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Joyce Corporation Ltd (ASX:JYC) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Joyce

What Is Joyce's Debt?

The image below, which you can click on for greater detail, shows that Joyce had debt of AU$5.52m at the end of December 2020, a reduction from AU$6.91m over a year. But on the other hand it also has AU$18.2m in cash, leading to a AU$12.7m net cash position.

How Strong Is Joyce's Balance Sheet?

We can see from the most recent balance sheet that Joyce had liabilities of AU$27.1m falling due within a year, and liabilities of AU$15.2m due beyond that. Offsetting this, it had AU$18.2m in cash and AU$1.45m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$22.7m.

While this might seem like a lot, it is not so bad since Joyce has a market capitalization of AU$67.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Joyce also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Joyce has boosted its EBIT by 44%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is Joyce'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Joyce may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Happily for any shareholders, Joyce actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

Although Joyce's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of AU$12.7m. And it impressed us with free cash flow of AU$22m, being 111% of its EBIT. So is Joyce's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 5 warning signs for Joyce (1 is significant) you should be aware of.

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. 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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