Is JS Global Lifestyle (HKG:1691) A Risky Investment?

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. As with many other companies JS Global Lifestyle Company Limited (HKG:1691) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for JS Global Lifestyle

What Is JS Global Lifestyle's Net Debt?

As you can see below, JS Global Lifestyle had US$942.1m of debt, at December 2021, which is about the same as the year before. You can click the chart for greater detail. However, it also had US$665.7m in cash, and so its net debt is US$276.5m.

How Strong Is JS Global Lifestyle's Balance Sheet?

According to the last reported balance sheet, JS Global Lifestyle had liabilities of US$1.62b due within 12 months, and liabilities of US$1.10b due beyond 12 months. Offsetting these obligations, it had cash of US$665.7m as well as receivables valued at US$1.27b due within 12 months. So it has liabilities totalling US$788.0m more than its cash and near-term receivables, combined.

Since publicly traded JS Global Lifestyle shares are worth a total of US$4.02b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

JS Global Lifestyle has a low net debt to EBITDA ratio of only 0.43. And its EBIT covers its interest expense a whopping 29.5 times over. So we're pretty relaxed about its super-conservative use of debt. Also good is that JS Global Lifestyle grew its EBIT at 12% over the last year, further increasing its ability to manage debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if JS Global Lifestyle 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. So we always check how much of that EBIT is translated into free cash flow. During the last three years, JS Global Lifestyle generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

Happily, JS Global Lifestyle's impressive interest cover implies it has the upper hand on its debt. And that's just the beginning of the good news since its conversion of EBIT to free cash flow is also very heartening. Zooming out, JS Global Lifestyle seems to use debt quite reasonably; and that gets the nod from us. While debt does bring risk, when used wisely it can also bring a higher return on equity. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for JS Global Lifestyle that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.