Health Check: How Prudently Does JLogo Holdings (HKG:8527) Use 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. We can see that JLogo Holdings Limited (HKG:8527) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for JLogo Holdings

How Much Debt Does JLogo Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2021 JLogo Holdings had S$2.80m of debt, an increase on S$1.12m, over one year. However, it does have S$3.53m in cash offsetting this, leading to net cash of S$734.0k.

How Healthy Is JLogo Holdings' Balance Sheet?

We can see from the most recent balance sheet that JLogo Holdings had liabilities of S$7.31m falling due within a year, and liabilities of S$4.54m due beyond that. On the other hand, it had cash of S$3.53m and S$92.0k worth of receivables due within a year. So its liabilities total S$8.22m more than the combination of its cash and short-term receivables.

Given JLogo Holdings has a market capitalization of S$263.3m, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, JLogo Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 JLogo 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.

Over 12 months, JLogo Holdings made a loss at the EBIT level, and saw its revenue drop to S$15m, which is a fall of 5.1%. That's not what we would hope to see.

So How Risky Is JLogo Holdings?

Although JLogo Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of S$3.1m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. 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 2 warning signs for JLogo Holdings (of which 1 is significant!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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