Jubilee Metals Group (LON:JLP) Takes On Some Risk With Its Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Jubilee Metals Group PLC (LON:JLP) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Jubilee Metals Group

What Is Jubilee Metals Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Jubilee Metals Group had UK£12.3m of debt, an increase on UK£1.06m, over one year. However, its balance sheet shows it holds UK£21.5m in cash, so it actually has UK£9.19m net cash.

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£53.2m falling due within a year, and liabilities of UK£15.8m due beyond that. Offsetting this, it had UK£21.5m in cash and UK£65.7m in receivables that were due within 12 months. So it can boast UK£18.2m more liquid assets than total liabilities.

This surplus suggests that Jubilee Metals Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Jubilee Metals Group boasts net cash, so it's fair to say it does not have a heavy debt load!

It is just as well that Jubilee Metals Group's load is not too heavy, because its EBIT was down 20% over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jubilee Metals Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Jubilee Metals Group 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. Over the last three years, Jubilee Metals Group recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While it is always sensible to investigate a company's debt, in this case Jubilee Metals Group has UK£9.19m in net cash and a decent-looking balance sheet. So although we see some areas for improvement, we're not too worried about Jubilee Metals Group's balance sheet. 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 3 warning signs for Jubilee Metals Group (1 makes us a bit uncomfortable) you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.