These 4 Measures Indicate That JBB Builders International (HKG:1903) Is Using Debt Reasonably Well

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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, JBB Builders International Limited (HKG:1903) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for JBB Builders International

What Is JBB Builders International's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 JBB Builders International had RM16.1m of debt, an increase on RM9.42m, over one year. But on the other hand it also has RM91.5m in cash, leading to a RM75.4m net cash position.

How Healthy Is JBB Builders International's Balance Sheet?

The latest balance sheet data shows that JBB Builders International had liabilities of RM65.4m due within a year, and liabilities of RM12.5m falling due after that. Offsetting these obligations, it had cash of RM91.5m as well as receivables valued at RM55.1m due within 12 months. So it can boast RM68.8m more liquid assets than total liabilities.

This surplus liquidity suggests that JBB Builders International's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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.

It was also good to see that despite losing money on the EBIT line last year, JBB Builders International turned things around in the last 12 months, delivering and EBIT of RM21m. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last year, JBB Builders International saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case JBB Builders International has RM75.4m in net cash and a decent-looking balance sheet. So we are not troubled with JBB Builders International's debt use. 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. Be aware that JBB Builders International is showing 4 warning signs in our investment analysis , and 3 of those are a bit unpleasant...

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.