Is Jolimark Holdings (HKG:2028) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Jolimark Holdings Limited (HKG:2028) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Jolimark Holdings

How Much Debt Does Jolimark Holdings Carry?

As you can see below, Jolimark Holdings had CN¥85.3m of debt at December 2020, down from CN¥92.2m a year prior. However, its balance sheet shows it holds CN¥104.4m in cash, so it actually has CN¥19.1m net cash.

A Look At Jolimark Holdings' Liabilities

According to the last reported balance sheet, Jolimark Holdings had liabilities of CN¥180.8m due within 12 months, and liabilities of CN¥1.49m due beyond 12 months. On the other hand, it had cash of CN¥104.4m and CN¥30.1m worth of receivables due within a year. So its liabilities total CN¥47.7m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Jolimark Holdings is worth CN¥126.1m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, Jolimark Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, Jolimark Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥276m, which is a fall of 7.0%. We would much prefer see growth.

So How Risky Is Jolimark Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Jolimark Holdings lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥50m of cash and made a loss of CN¥25m. However, it has net cash of CN¥19.1m, so it has a bit of time before it will need more capital. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Jolimark Holdings (of which 1 is concerning!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. 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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