Health Check: How Prudently Does Jolimark Holdings (HKG:2028) Use Debt?

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 note that Jolimark Holdings Limited (HKG:2028) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Jolimark Holdings

How Much Debt Does Jolimark Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Jolimark Holdings had CN¥108.7m of debt in December 2023, down from CN¥118.7m, one year before. However, it does have CN¥37.3m in cash offsetting this, leading to net debt of about CN¥71.5m.

How Strong Is Jolimark Holdings' Balance Sheet?

The latest balance sheet data shows that Jolimark Holdings had liabilities of CN¥152.2m due within a year, and liabilities of CN¥25.2m falling due after that. Offsetting these obligations, it had cash of CN¥37.3m as well as receivables valued at CN¥27.5m due within 12 months. So it has liabilities totalling CN¥112.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥49.0m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Jolimark Holdings would probably need a major re-capitalization if its creditors were to demand repayment. 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 Jolimark 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 Jolimark Holdings had a loss before interest and tax, and actually shrunk its revenue by 27%, to CN¥203m. To be frank that doesn't bode well.

Caveat Emptor

While Jolimark Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable CN¥67m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of CN¥24m 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. For instance, we've identified 4 warning signs for Jolimark Holdings (3 shouldn't be ignored) 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.

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