JBB Builders International (HKG:1903) Is Using Debt Safely

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies JBB Builders International Limited (HKG:1903) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for JBB Builders International

How Much Debt Does JBB Builders International Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 JBB Builders International had RM9.42m of debt, an increase on none, over one year. But it also has RM92.0m in cash to offset that, meaning it has RM82.6m net cash.

How Strong Is JBB Builders International's Balance Sheet?

We can see from the most recent balance sheet that JBB Builders International had liabilities of RM161.4m falling due within a year, and liabilities of RM6.73m due beyond that. On the other hand, it had cash of RM92.0m and RM166.0m worth of receivables due within a year. So it actually has RM89.9m more liquid assets than total liabilities.

This surplus strongly suggests that JBB Builders International has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, JBB Builders International boasts net cash, so it's fair to say it does not have a heavy debt load! 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 JBB Builders International will need earnings to service that debt. 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.

Over 12 months, JBB Builders International reported revenue of RM360m, which is a gain of 423%, although it did not report any earnings before interest and tax. That's virtually the hole-in-one of revenue growth!

So How Risky Is JBB Builders International?

While JBB Builders International lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow RM3.5m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We also take heart from the solid 423% revenue growth in 12 months; undoubtedly a good sign. So this may well be an interesting business to watch grow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example JBB Builders International has 2 warning signs (and 1 which is a bit concerning) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.