The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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, Groupe JAJ (EPA:GJAJ) does carry debt. But the more important question is: how much risk is that debt creating?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Groupe JAJ's Net Debt?
As you can see below, at the end of September 2020, Groupe JAJ had €4.25m of debt, up from €1.89m a year ago. Click the image for more detail. However, because it has a cash reserve of €323.2k, its net debt is less, at about €3.93m.
A Look At Groupe JAJ's Liabilities
According to the last reported balance sheet, Groupe JAJ had liabilities of €14.1m due within 12 months, and liabilities of €3.11m due beyond 12 months. Offsetting these obligations, it had cash of €323.2k as well as receivables valued at €8.66m due within 12 months. So it has liabilities totalling €8.21m more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the €5.34m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Groupe JAJ would probably need a major re-capitalization if its creditors were to demand repayment. 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 Groupe JAJ will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, Groupe JAJ made a loss at the EBIT level, and saw its revenue drop to €19m, which is a fall of 12%. We would much prefer see growth.
Not only did Groupe JAJ's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at €134k. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of €159k. In the meantime, we consider the stock to be risky. 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 example Groupe JAJ has 4 warning signs (and 2 which are concerning) we think you should know about.
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.
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