Jia Group Holdings (HKG:8519) Has Debt But No Earnings; Should You Worry?

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.' 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 Jia Group Holdings Limited (HKG:8519) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jia Group Holdings

What Is Jia Group Holdings's Debt?

As you can see below, at the end of June 2021, Jia Group Holdings had HK$13.1m of debt, up from HK$11.8m a year ago. Click the image for more detail. But on the other hand it also has HK$31.3m in cash, leading to a HK$18.2m net cash position.

How Healthy Is Jia Group Holdings' Balance Sheet?

The latest balance sheet data shows that Jia Group Holdings had liabilities of HK$76.1m due within a year, and liabilities of HK$31.5m falling due after that. On the other hand, it had cash of HK$31.3m and HK$12.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$64.3m.

While this might seem like a lot, it is not so bad since Jia Group Holdings has a market capitalization of HK$130.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Jia Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Jia Group Holdings'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.

Over 12 months, Jia Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$193m, which is a fall of 4.2%. That's not what we would hope to see.

So How Risky Is Jia Group Holdings?

While Jia Group Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$1.3m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Jia Group Holdings (of which 1 is potentially serious!) 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.
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