Is Janco Holdings (HKG:8035) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Janco Holdings Limited (HKG:8035) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Janco Holdings

What Is Janco Holdings's Debt?

As you can see below, Janco Holdings had HK$123.5m of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. However, it does have HK$12.1m in cash offsetting this, leading to net debt of about HK$111.4m.

How Strong Is Janco Holdings' Balance Sheet?

According to the last reported balance sheet, Janco Holdings had liabilities of HK$182.0m due within 12 months, and liabilities of HK$14.4m due beyond 12 months. Offsetting these obligations, it had cash of HK$12.1m as well as receivables valued at HK$69.4m due within 12 months. So it has liabilities totalling HK$114.9m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of HK$81.0m, we think shareholders really should watch Janco Holdings's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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.

Over 12 months, Janco Holdings made a loss at the EBIT level, and saw its revenue drop to HK$382m, which is a fall of 33%. That makes us nervous, to say the least.

Caveat Emptor

While Janco 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 HK$7.7m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of HK$8.3m didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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. For example, we've discovered 1 warning sign for Janco Holdings that you should be aware of before investing here.

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.