Is Jubilee Metals Group (LON:JLP) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, Jubilee Metals Group PLC (LON:JLP) does carry debt. But is this debt a concern to shareholders?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jubilee Metals Group

How Much Debt Does Jubilee Metals Group Carry?

As you can see below, Jubilee Metals Group had UK£10.6m of debt at December 2020, down from UK£19.5m a year prior. On the flip side, it has UK£9.77m in cash leading to net debt of about UK£870.0k.

How Strong Is Jubilee Metals Group's Balance Sheet?

We can see from the most recent balance sheet that Jubilee Metals Group had liabilities of UK£17.9m falling due within a year, and liabilities of UK£20.7m due beyond that. On the other hand, it had cash of UK£9.77m and UK£31.9m worth of receivables due within a year. So it can boast UK£3.04m more liquid assets than total liabilities.

Having regard to Jubilee Metals Group's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the UK£425.0m company is struggling for cash, we still think it's worth monitoring its balance sheet. Carrying virtually no net debt, Jubilee Metals Group has a very light debt load indeed.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With debt at a measly 0.021 times EBITDA and EBIT covering interest a whopping 17.7 times, it's clear that Jubilee Metals Group is not a desperate borrower. Indeed relative to its earnings its debt load seems light as a feather. Even more impressive was the fact that Jubilee Metals Group grew its EBIT by 280% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Jubilee Metals Group'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it's worth checking how much of that EBIT is backed by free cash flow. In the last three years, Jubilee Metals Group basically broke even on a free cash flow basis. Some might say that's a concern, when it comes considering how easily it would be for it to down debt.

Our View

Jubilee Metals Group's interest cover suggests it can handle its debt as easily as Cristiano Ronaldo could score a goal against an under 14's goalkeeper. But the stark truth is that we are concerned by its conversion of EBIT to free cash flow. Zooming out, Jubilee Metals Group seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. 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. Be aware that Jubilee Metals Group is showing 2 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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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