Is Kumpulan Jetson Berhad (KLSE:JETSON) Using Too Much Debt?

Simply Wall St
September 26, 2021
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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. Importantly, Kumpulan Jetson Berhad (KLSE:JETSON) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Kumpulan Jetson Berhad

What Is Kumpulan Jetson Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that Kumpulan Jetson Berhad had debt of RM56.4m at the end of June 2021, a reduction from RM64.1m over a year. However, it also had RM7.04m in cash, and so its net debt is RM49.4m.

KLSE:JETSON Debt to Equity History September 27th 2021

How Healthy Is Kumpulan Jetson Berhad's Balance Sheet?

We can see from the most recent balance sheet that Kumpulan Jetson Berhad had liabilities of RM128.8m falling due within a year, and liabilities of RM29.8m due beyond that. Offsetting this, it had RM7.04m in cash and RM97.2m in receivables that were due within 12 months. So it has liabilities totalling RM54.4m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Kumpulan Jetson Berhad has a market capitalization of RM93.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kumpulan Jetson Berhad'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.

In the last year Kumpulan Jetson Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 33%, to RM195m. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Despite the top line growth, Kumpulan Jetson Berhad still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost RM32k at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled RM215k in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. For example, we've discovered 3 warning signs for Kumpulan Jetson Berhad 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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