We Think Jia Group Holdings (HKG:8519) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Jia Group Holdings Limited (HKG:8519) does carry 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. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Jia Group Holdings

What Is Jia Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2021 Jia Group Holdings had debt of HK$51.6m, up from HK$11.8m in one year. However, it does have HK$31.3m in cash offsetting this, leading to net debt of about HK$20.3m.

A Look At Jia Group Holdings' Liabilities

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$6.90m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$69.4m.

This is a mountain of leverage relative to its market capitalization of HK$111.4m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Jia Group Holdings 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.

In the last year Jia Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 5.2%, to HK$204m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Jia Group Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable HK$19m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of HK$15m into a profit. So to be blunt we do think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Jia Group Holdings is showing 4 warning signs in our investment analysis , and 1 of those is significant...

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.