Is Janco Holdings (HKG:8035) Using Debt In A Risky Way?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Janco Holdings Limited (HKG:8035) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Janco Holdings's Debt?

As you can see below, at the end of December 2024, Janco Holdings had HK$12.8m of debt, up from HK$3.00m a year ago. Click the image for more detail. However, it does have HK$13.2m in cash offsetting this, leading to net cash of HK$422.0k.

A Look At Janco Holdings' Liabilities

According to the last reported balance sheet, Janco Holdings had liabilities of HK$78.8m due within 12 months, and liabilities of HK$20.3m due beyond 12 months. On the other hand, it had cash of HK$13.2m and HK$53.5m worth of receivables due within a year. So it has liabilities totalling HK$32.4m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of HK$49.2m, so it does suggest shareholders should keep an eye on Janco Holdings' use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Janco 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 it is Janco Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Check out our latest analysis for Janco Holdings

In the last year Janco Holdings had a loss before interest and tax, and actually shrunk its revenue by 5.6%, to HK$251m. That's not what we would hope to see.

So How Risky Is Janco Holdings?

Although Janco Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$23m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. We've identified 3 warning signs with Janco Holdings (at least 2 which shouldn't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.