Health Check: How Prudently Does Jete Power Holdings (HKG:8133) Use Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Jete Power Holdings Limited (HKG:8133) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Jete Power Holdings

How Much Debt Does Jete Power Holdings Carry?

As you can see below, at the end of June 2021, Jete Power Holdings had HK$22.0m of debt, up from none a year ago. Click the image for more detail. However, because it has a cash reserve of HK$6.13m, its net debt is less, at about HK$15.9m.

How Strong Is Jete Power Holdings' Balance Sheet?

According to the last reported balance sheet, Jete Power Holdings had liabilities of HK$35.8m due within 12 months, and liabilities of HK$13.5m due beyond 12 months. On the other hand, it had cash of HK$6.13m and HK$14.2m worth of receivables due within a year. So its liabilities total HK$28.9m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of HK$23.9m, we think shareholders really should watch Jete Power Holdings's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 Jete Power Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Jete Power Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 14%, to HK$86m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Jete Power Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$8.4m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of HK$756k over the last twelve months. That means it's on the risky side of things. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Jete Power Holdings (of which 2 make us uncomfortable!) you should know about.

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.

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.

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