Does JBB Builders International (HKG:1903) Have A Healthy Balance Sheet?

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. We can see that JBB Builders International Limited (HKG:1903) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for JBB Builders International

What Is JBB Builders International's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 JBB Builders International had RM13.6m of debt, an increase on RM10.6m, over one year. But on the other hand it also has RM96.8m in cash, leading to a RM83.2m net cash position.

A Look At JBB Builders International's Liabilities

We can see from the most recent balance sheet that JBB Builders International had liabilities of RM145.0m falling due within a year, and liabilities of RM10.6m due beyond that. Offsetting these obligations, it had cash of RM96.8m as well as receivables valued at RM163.5m due within 12 months. So it actually has RM104.8m more liquid assets than total liabilities.

This luscious liquidity implies that JBB Builders International's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that JBB Builders International has more cash than debt is arguably a good indication that it can manage its debt safely.

Although JBB Builders International made a loss at the EBIT level, last year, it was also good to see that it generated RM17m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is JBB Builders International's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While JBB Builders International has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, JBB Builders International burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that JBB Builders International has net cash of RM83.2m, as well as more liquid assets than liabilities. So we don't have any problem with JBB Builders International's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for JBB Builders International (2 are a bit unpleasant) you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.