Is JAKS Resources Berhad (KLSE:JAKS) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, JAKS Resources Berhad (KLSE:JAKS) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for JAKS Resources Berhad

What Is JAKS Resources Berhad's Net Debt?

The image below, which you can click on for greater detail, shows that JAKS Resources Berhad had debt of RM370.7m at the end of March 2021, a reduction from RM407.4m over a year. However, it also had RM27.4m in cash, and so its net debt is RM343.4m.

How Healthy Is JAKS Resources Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that JAKS Resources Berhad had liabilities of RM577.9m due within 12 months and liabilities of RM319.0m due beyond that. Offsetting this, it had RM27.4m in cash and RM577.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by RM292.4m.

While this might seem like a lot, it is not so bad since JAKS Resources Berhad has a market capitalization of RM1.06b, 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 future earnings, more than anything, that will determine JAKS Resources Berhad's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year JAKS Resources Berhad had a loss before interest and tax, and actually shrunk its revenue by 76%, to RM202m. To be frank that doesn't bode well.

Caveat Emptor

Not only did JAKS Resources Berhad's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable RM177m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through RM196k of cash over the last year. So suffice it to say we do consider the stock to be risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for JAKS Resources Berhad (of which 1 shouldn't be ignored!) 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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