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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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, Jolimark Holdings Limited (HKG:2028) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Jolimark Holdings

What Is Jolimark Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Jolimark Holdings had CN¥117.2m in debt in June 2021; about the same as the year before. But on the other hand it also has CN¥119.6m in cash, leading to a CN¥2.42m net cash position.

How Strong Is Jolimark Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Jolimark Holdings had liabilities of CN¥219.5m due within 12 months and liabilities of CN¥7.06m due beyond that. Offsetting this, it had CN¥119.6m in cash and CN¥28.0m in receivables that were due within 12 months. So it has liabilities totalling CN¥79.0m more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's CN¥76.8m market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Jolimark Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Jolimark 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, Jolimark Holdings reported revenue of CN¥316m, which is a gain of 20%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Jolimark Holdings?

While Jolimark Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥21m. 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. One positive was the revenue growth of 20% over the last year. But the stock still looks risky to us. 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 Jolimark Holdings is showing 4 warning signs in our investment analysis , and 1 of those is significant...

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.

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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